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HMRC internal manual

International Manual

Reliefs against Controlled Foreign Companies' tax: Interaction with capital gains relief


To the extent that tax paid under Chapter IV has been relieved under ICTA88/SCH26/PARA3 (relief on capital gains, see INTM256220) it has to be excluded from the ‘gross attributed tax’ qualifying for relief under ICTA88/SCH26/PARA4(2). This restriction applies where

  1. any sum forming part of the ‘gross attributed tax’ in relation to a dividend paid by a controlled foreign company has been allowed as a deduction on a disposal of shares in any company, and
  2. a person receiving a dividend (‘the primary dividend’) in respect of the shares disposed of is entitled to relief under ICTA88/SCH26/PARA4(2) in respect of all or any of the “gross attributed tax”.

In cases where (a) and (b) above apply, the relief under ICTA88/SCH26/PARA4(2) is reduced by the amount of the deduction allowed under ICTA88/SCH26/PARA3.

The restriction as described above is not, however, adequate to deal with the case where, for example, a United Kingdom company disposes of its shares in a controlled foreign company to a non-resident subsidiary. In these circumstances relief is potentially available twice in respect of the same amount of tax: first, as a capital gains deduction on disposal of the shares in the controlled foreign company, and second, as ‘gross attributed tax’ if following the disposal the controlled foreign company’s profits are remitted by way of indirect dividend to the United Kingdom. The restriction as described above would not apply in these circumstances because the dividend received by the United Kingdom company is in respect of the shares in the non-resident subsidiary which acquired the interest in the controlled foreign company. The dividend is not in respect of the shares disposed of.

The restriction is therefore extended to cover the case where a United Kingdom resident receives any ‘relevant dividend’. A ‘relevant dividend’ is a dividend in respect of shares in a non-resident company which reflects a dividend paid in respect of the shares the disposal of which established the entitlement to capital gains relief under ICTA88/SCH26/PARA3.