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HMRC internal manual

International Manual

Controlled Foreign Companies: Computation of Chargeable Profits and Creditable Tax: Creditable tax

Definition - ICTA88/S751(6)

Where the provisions of Chapter IV apply to a controlled foreign company, ICTA88/S747(3) requires that the chargeable profits and creditable tax of the company should be apportioned (see INTM255850). ‘Creditable tax’ is defined as the aggregate of the following amounts:

  1. The amount of any double taxation relief for foreign tax which would be available against Corporation Tax on income under the rules in TIOPA10/Part 2. This is calculated on the basis of the assumption in ICTA88/SCH24 and as if the controlled foreign company were liable to Corporation Tax on its chargeable profits.
  2. United Kingdom Income Tax deducted at source from payments (for example, of interest) received by the controlled foreign company which would on the assumption in (a) above be available for set-off against Corporation Tax under CTA10/S967.
  3. United Kingdom Income or Corporation Tax actually charged in respect of the chargeable profits of the controlled foreign company. This will include Corporation Tax charged in respect of the income from a permanent establishment through which the controlled foreign company carries on a trade in the United Kingdom.

Foreign Taxes

For the purposes of computing its chargeable profits and creditable tax, a controlled foreign company is assumed to be resident in the UK ( ICTA88/SCH24/PARA1(1)). The company thus meets the general condition in TIOPA10/S26 that double taxation relief is available only to persons resident in the UK.

Foreign tax eligible for credit under TIOPA10/Part 2 comprises both tax for which relief is due under the provisions of a double taxation agreement and also tax qualifying for credit under the unilateral relief provisions of TIOPA10/S18. The definition of creditable tax includes all taxes qualifying for double taxation relief in respect of income whether imposed under the laws of the controlled foreign company’s territory of residence (see INTM254400) or any third country. Creditable tax includes taxes levied by political subdivisions of a country, for example, Swiss cantonal taxes, where these qualify for double taxation relief against United Kingdom taxes on income under the normal rules. Details of the foreign taxes regarded as qualifying for relief can be found under the relevant country heading in the Double Taxation Relief manual at DT2140 onwards.

Foreign taxes are included in creditable tax subject to the normal double taxation relief rules applicable to UK companies. To the extent that foreign tax on any particular source of income exceeds the UK tax that would be due the creditable tax is therefore restricted under TIOPA10/S42. (It should however be noted that in arriving at net chargeable profits for the acceptable distribution test there is no limit on the amount of creditable tax that can be deducted (INTM254650).


X is a controlled foreign company registered as an Exempt Company in Jersey. It operates through permanent establishments in the UK and France. For the year to 31 March, when the United Kingdom rate of Corporation Tax is 33%, it makes profits of £10,000 at each of its PE’s and pays UK and French Corporation Tax of £3,300 and £3,400 respectively. X also has investment income of £100,000 (some in UK dividends) - most of this bears no tax anywhere but interest of £5,000 from a UK company has Income Tax of £1,250 deducted at source. X pays flat-rate “Corporation Tax” of £500 to the Jersey authorities.

The creditable tax of X is computed as follows:

French Corporation Tax (restricted to the United Kingdom tax attributable to the French permenent establishment income) 3,300
United Kingdom Corporation Tax on PE income 3,300
United Kingdom Income Tax deducted from interest 1,250

The dividends from the United Kingdom company are excluded from the computation of its chargeable profits under Section 208. The Jersey Corporation Tax is not a tax on profits and as no relief is available in respect of it under TIOPA10/Part 2, it fails to qualify as creditable tax.

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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 controlled foreign company should be included in the company’s creditable tax up to the limit specified in the double taxation agreement.

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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, 36TC581). This rule applies generally for double taxation relief purposes.

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Dividends Received from a Controlled Foreign Company - ICTA88/SCH26/PARA4 and 5

Where a controlled foreign company receives a dividend from another controlled foreign company, the dividend will be included in the first company’s chargeable profits as liability in the normal way. Where however the dividend has been paid out of profits of the second company which have been the subject of a Chapter IV charge, there is potentially a double charge to tax if the first company’s chargeable profits are apportioned and assessed under Chapter IV. However, ICTA88/SCH26/PARA4 and 5 mitigate this double charge by treating the Chapter IV tax assessed in respect of the second company’s chargeable profits as underlying tax which qualifies for double taxation relief. This tax is accordingly included in the first company’s creditable tax. Detailed guidance on the provisions of ICTA88/SCH26/PARA 4 and 5 are given at INTM256230 to INTM256320.