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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: Specific transactions: derivatives

If a derivative is held or issued whose value is derived from an income bearing asset, then profits or losses from the derivative should be aggregated with those from the asset in determining the amount of any profit attributable to the income. The profits or losses from the derivative should include all receipts and payments made under the derivative contract as well as gains or losses.

In some cases it will be necessary to include only part of the profit or loss from a derivative. This will be the case if:

  • the derivative takes its value partly from the income bearing asset and partly from other subject matter; or
  • the asset represents a hedge against part but not all of the risk taken on by the issuing or holding of a derivative.

In such cases, the profits or losses from the derivative should be included to the extent that their value is matched with the asset value. For example, if a derivatives trader issues equity derivatives and hedges part of the risk by holding equities, the profit or loss from the unhedged part of the risk should be kept separate from any claim for credit relief in respect of tax withheld from the dividend income.