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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: Rules for attributing Chapter IV tax

ICTA88/SCH26/PARA5(3) to (6)

The guidance in the following paragraphs does not apply to dividends paid by a controlled foreign company out of specified profits.

Self assessments under Chapter IV will not necessarily reflect the full amount of the profits of the controlled foreign company which have been apportioned. For example, individuals, non-residents and United Kingdom companies with a small interest in the controlled foreign company (see INTM255880) will not be liable to Chapter IV tax. However, without some modification to the normal double taxation rules, ‘gross attributed tax’ would be apportioned rateably among all persons receiving a dividend from the controlled foreign company. So part of the relief under ICTA88/SCH26/PARA4(2) would be given to persons who had not self assessed under Chapter IV, to the detriment of those companies which had.

ICTA88/SCH26/PARA5(3) applies therefore where less than the full amount of chargeable profits is apportioned to United Kingdom companies which are liable to Chapter IV tax. The dividends paid by the controlled foreign company are divided into two classes, namely

  • those paid primarily out of taxed profits, and
  • those paid primarily out of other profits.

The ‘taxed profits’ are the amount of the controlled foreign company’s profits which corresponds to the proportion of chargeable profits which results in self assessments. The ‘gross attributed tax’ which qualifies for relief under ICTA88/SCH26/PARA4(2) is then regarded as attributable to the taxed profits. If a dividend is received by a UK company which was self assessed under Chapter IV in respect of the chargeable profits which the dividend represents, or is received by a successor in title of such a company, the dividend is treated as paid primarily out of taxed profits and relief under ICTA88/SCH26/PARA4(2) is available accordingly. A dividend received by any other person is treated as paid primarily out of profits which are not taxed profits and relief under ICTA88/SCH26/PARA4(2) is not available.

For this purpose a successor in title of a UK company means a person who is a successor to the whole or any part of the interest in the controlled foreign company which resulted in the apportionment of chargeable profits to the UK company.

Example 6 at INTM256320 illustrates the operation of ICTA88/SCH26/PARA5(3) and (4).