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HMRC internal manual

International Manual

Controlled Foreign Companies: Creditable tax of a CFC: Other matters

Tax Spared

Where the terms of a double taxation agreement provide for credit to be given against UK tax in respect of tax ‘spared’ in an overseas territory, any tax ‘spared’ by the overseas territory in relation to a CFC should be included in the company’s creditable tax up to the limit specified in the double taxation agreement (TIOPA10/S20).

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Conversion of Foreign Taxes into Sterling

Where it is necessary to convert foreign taxes into sterling in order to compute creditable tax, the exchange rate to be used is that prevailing at the date on which the foreign taxes became payable (see Greig v Ashton 36 TC 581). This rule applies generally for double taxation relief purposes.

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Interaction with the reduction of assumed total profits passing through the gateway

When assumed total profits pass through the gateway it will often be the case that a reduced sum of those profits will comprise the amount of chargeable profits apportioned amongst relevant persons. This will have an impact on the amount of creditable tax that should be apportioned to those persons. Where only part of the CFC’s assumed total profits pass through the gateway (see Chapters 3 to 8), the creditable tax will be restricted to the tax that relates to the income included in the CFC’s chargeable profits.

For example, if the CFC has trading profits of 100 and interest income of 80 on which it has suffered withholding tax of 20 and only the interest income of 80 passes through the CFC charge gateway, the creditable tax will be 20 (i.e. the total amount of withholding tax on the interest). Contrast that with a CFC that holds IP and receives royalties of 180 from which withholding tax of 20 has been deducted evenly across the whole of the income received: if the chargeable profits are 90, the withholding tax will be 10.