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HMRC internal manual

International Manual

Reliefs against Controlled Foreign Companies' tax: Wasted relief

ICTA88/SCH26/PARA4(4) and (5)

If a controlled foreign company, or an intermediate foreign holding company, pays a dividend to a person resident in the United Kingdom, and withholding tax is deducted at source from the dividend paid, credit is available for the withholding tax under the normal double taxation relief rules. Such relief is additional to any relief which a company may claim for the underlying tax - whether ‘gross attributed tax’ or foreign tax - suffered by the controlled foreign company or the intermediate foreign holding company. If, however, the total foreign tax available for credit relief exceeds the United Kingdom tax on the dividend, then TIOPA10/S36 or TIOPA10/S42 applies. The excess credit is wasted and cannot be set against any other UK tax liability. However, relief is available under ICTA88/SCH26/PARA4(4) and 4(5) in respect of any withholding tax included in the amount of excess credit.

Relief for the excess credit arising in these circumstances is given as follows. First, the excess credit is calculated for each resident person in receipt of a dividend. The excess is then restricted where necessary to the amount of withholding taxes suffered on the dividend. The resulting amount is referred to as ‘wasted relief’. The aggregate wasted relief for all UK residents is then treated as available to reduce the ‘gross attributed tax’.

Any company whose liability made up the gross attributed tax may claim relief. A claimant will be a UK resident company for which an amount is due in respect of a controlled foreign company’s apportioned chargeable profits which have been distributed to the UK. The claimant’s liability under Chapter IV is reduced by the amount of the “wasted relief”. The Chapter IV tax is discharged or repaid so far as is necessary to give effect to the reduction.

Claims for ‘wasted relief’ should be part of a return.

  1. The ‘wasted relief’ includes only withholding taxes suffered when a dividend is paid to a United Kingdom resident person. Where a controlled foreign company pays a dividend to an intermediate foreign holding company under deduction of withholding tax and the holding company pays a dividend to the United Kingdom, the withholding tax is part of the holding company’s underlying tax and cannot be included in the computation of ‘wasted relief’.
  2. Where the United Kingdom recipient of a dividend is not a United Kingdom resident company assessed to tax in respect of the controlled foreign company’s chargeable profits, the relief is available to the United Kingdom companies assessed under Chapter IV and not to the person receiving the dividend. Where, for example, a United Kingdom company assessed under Chapter IV disposes of it shares in the controlled foreign company, it may still obtain a reduction in its liability for ‘wasted relief’ even though the dividends are received by its successor in title.

Example 5 at INTM256320 illustrates ‘wasted relief’.