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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: 1998 legislation: Regulations: SI 1999/3330

Following the 1998 changes, the regulations were amended (SI1999/3330). In particular, the amended regulations deal with two aspects of the new legislation:

  • The change (by way of clarification) from use of the term ‘foreign loan interest’ to ‘foreign interest’ (and consequential changes to terms like ‘lender’); and
  • The extension of the limitation of relief in respect of foreign dividends.

Paragraph 3(3) of SI999/3330 accordingly provides that in relation to foreign interest, other than loan interest, the definitions of interbank market, relevant interbank market and interest period will apply to the obligations under which a right to interest arises as they do elsewhere to a loan or loan agreement. Any references to ‘principal outstanding’ are replaced by reference to ‘any amount other than interest which is owing’ by the payer of the foreign interest to the qualifying taxpayer.

In relation to foreign dividends, paragraph 2(1) defines the cost of acquiring the asset as the cost of acquiring the right to the dividend (if any) and the cost of acquiring the stocks, funds, shares or securities (if any) out of which, or in respect of which, the dividend is paid. The definitions of interbank market and relevant interbank market are then applied (paragraph 3(4)) in relation to foreign dividends as if:

  • so much of the cost of acquiring the asset as has not been repaid to the qualifying taxpayer represents a loan from the payee of the dividend to the payer thereof and the dividend represents interest on that loan;
  • the date of the ‘loan’ is treated as the date on which any cost of acquiring the asset was first expended; and
  • interest periods last one year and begin on the date the ‘loan’ was made (or at the date of expiry of the previous interest period), unless the ‘loan’ subsists for less than a year, in which case the interest period lasts the life of the ‘loan’.

To meet the situation described in INTM168180, paragraph 3(6) of the 1999 regulations extends paragraph 3(5) to include ‘arrangements’ which in turn includes ‘all loans, obligations and assets’ referred to in the regulations. What is now to be taken into account is not an apportioned finance cost but the best estimate of total expenditure incurred in financing any ‘arrangements’. However, in reaching a best estimate, regard is still to be had to the cost of obtaining funds for such financing, the terms on which the arrangements were made and any other relevant matters.