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HMRC internal manual

International Manual

UK residents with foreign income or gains: dividends: Determination of rates of foreign underlying tax - Foreign Income - company tax deducted - example

In certain, mainly Commonwealth, countries dividends are normally described as being paid after deduction of tax at a rate equal to the rate of company tax chargeable in that country. This is not a direct tax but reflects the fact that the dividend has been paid from profits that have been subject to company tax and is referred to as `company tax deducted’. Credit for such tax is not due to portfolio shareholders, with the few exceptions mentioned in INTM164410.

Where credit is due, exceptionally, to portfolio shareholders, or to direct investors, the rate of tax shown as having been deducted from the dividend will almost always differ from the rate of underlying tax borne by the foreign company on its profits. In respect of dividends declared on or after 27 July 1993, the relief due is computed only by reference to the tax paid in the other country in respect of its profits by the company paying the dividend. The Underlying Tax Group calculates this in the usual way by examination of the overseas company’s accounts and tax assessments. Since the tax deducted is not regarded as a direct tax, the starting point of the foreign income computation is the net dividend received.


A dividend voucher shows dividend 8000 less 20% CTD, 1600 to make a net amount of 6,400. If the agreed rate of tax on the company’s profits is 25%, the foreign income computation is

Net dividend 6,400.00
Gross at 25% (i.e. 6,400/75% x 25%) 2,133.00
Foreign income 8,533.00
Corporation Tax at 30% 2,559.90
Less tax credit relief 2,133.00
Net Corporation Tax payable 426.90