HMRC internal manual

International Manual

INTM168030 - Foreign tax paid on trade income: limitation on credit: Specific transactions: deduction for foreign tax

Where credit for foreign tax has been denied, a deduction may be given against trade profits based on the lower of two figures:

  • The amount of foreign tax paid for which no credit was given;
  • The amount of loss (if any) calculated in accordance with the above principles, after deducting the foreign tax.

Example 1

  Sale of shares 930
  Gross dividend 100
  Purchase of shares 1000
  Overheads & interest 10
  Net profit 20

In the above, tax withheld from the dividend was 15, but credit relief was limited to the tax on 20, which was 6. Hence there is a potential deduction for the balance of 9 foreign tax. However the deduction is limited to any loss on the transaction, after excluding the foreign tax from income. There was a profit of 20 and foreign tax of 15, so in this example, there was an overall profit of 5, so no deduction may be given.

Example 2

In the above example, if the sale proceeds were 920, the net profit would be 10, so credit relief would be restricted to 3, leaving a potential deduction of 12. The loss after excluding foreign tax would be 5, so this would be the actual tax deduction.

Example 3

If sale proceeds were 910, there would be no profit and so no credit relief. The loss after excluding foreign tax would be 15, so all of the foreign tax is deductible.