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HMRC internal manual

International Manual

HM Revenue & Customs
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Foreign tax paid on trade income: limitation on credit: 1998 legislation: Loan interest

For all foreign interest it is necessary to establish the amount of the foreign interest in respect of which the credit for the foreign tax may be subject to limitation.

Where the foreign tax is withheld by the payer from the interest stipulated in the loan or other agreement and only the net amount is paid over, the gross interest is the interest stipulated in the agreement, that is the net payment increased by the foreign tax on normal principles. Many international loan agreements however provide for withholding taxes to be accounted for by the borrower and for the full amount of the interest stipulated in the agreement to be paid over. In these cases it is necessary to establish the foreign tax accounted for by the payer and to add it in order to arrive at the gross amount of the foreign loan interest. In calculating the gross amount of the foreign loan interest no account should be taken of any foreign tax `spared’ at this stage (see INTM168120 as regards the subsequent treatment of tax `spared’).

ICTA88/S798(3) and ICTA88/S798A(4), following the FA98 changes, ensures that, following the introduction by FA96 of loan relationship legislation, the gross amount of the foreign loan interest continues to be calculated as described above irrespective of the entries in the accounts of the lender.

It should be noted that although the gross foreign interest is the amount by reference to which the first limit to credit relief is established, it is not necessarily the amount which enters into the computation of the bank’s income for purposes of assessment to Corporation Tax. Adjustments may be required for excess foreign tax paid (see INTM168110) and for tax `spared’ (see INTM168120).