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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: Relief for dividends paid by a Controlled Foreign Company: outline

Where a dividend representing the apportioned chargeable profits of a controlled foreign company is charged to tax in the hands of a United Kingdom resident recipient, the same profits are effectively exposed to double taxation. The provisions of ICTA88/SCH26/PARA4 to 6 are designed to relieve such double taxation by giving relief for the tax charged under Chapter IV against the tax charged on the dividend. The main elements of the relieving provisions are as follows:

  • Tax paid under Chapter IV is treated as foreign tax qualifying for credit relief as underlying tax in accordance with the rules for double taxation relief in Part XVIII ICTA 1988.
  • The normal double taxation rules are modified in two respects, namely

    the 10 % control requirement for underlying relief does not apply, and  
    

    (ii) dividends are not grossed up in respect of Chapter IV tax (see INTM256280).

  • There are identification rules for cases where a dividend reaches a United Kingdom company indirectly (for example, through an intermediate holding company) ( see (c) of INTM256270).
  • There is provision to relieve direct foreign taxes (that is, withholding taxes) which have been suffered on dividends and which would not otherwise be relieved (see INTM256290).
  • There are rules for attributing Chapter IV tax in cases where not all of the chargeable profits of a controlled foreign company produce a Chapter IV assessment (for example, because some of those profits have been apportioned to non-residents) - see INTM256300).
  • There are rules governing the interaction of ICTA88/SCH26/PARA3 and 4 (see INTM256310).
  • The relief applies in computing the creditable tax of a controlled foreign company which receives a dividend from another controlled foreign company as well as in computing the liability to tax of a recipient company resident in the UK (see INTM255830).

Examples of the working of the relief are given at INTM256320.