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HMRC internal manual

International Manual

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HM Revenue & Customs
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Reliefs against Controlled Foreign Companies' tax: Reliefs to prevent double charge

ICTA88/SCH26/PARA 3 to 6 contain provisions to mitigate the double charge to tax which may arise where a United Kingdom company is assessed under Chapter IV and either-

  1. disposes of the shares in the controlled foreign company (or an intermediate holding company) which gave rise to the Chapter IV liability, or
  2. receives a dividend derived directly or indirectly from the profits of the controlled foreign company in respect of which the Chapter IV liability arose.

A double charge will arise under (a) above where the profits which gave rise to the Chapter IV liability have been retained by the controlled foreign company so that the disposal proceeds of the shares reflect the value of the profits apportioned to the UK company. In those circumstances a tax liability arises both under Chapter IV and on the chargeable gain accruing on the disposal of the shares. The form of relief to mitigate the double charge is that the tax charged under Chapter IV is allowable as a deduction in computing the chargeable gain on the disposal of the shares. Further details are given in INTM256220.

A double charge will arise under (b) above because a dividend paid out of profits which have given rise to a Chapter IV charge will be chargeable in the normal way. The form of relief to mitigate the double charge is to allow the tax charged under Chapter IV to be credited as underlying tax against the tax liability on the dividend. Further details are given at INTM256230 onwards.