MTT09200 - Miscellaneous pages: Recognition and creditability of foreign qualified domestic minimum top-up taxes
In general, we would expect a Qualifying Domestic Minimum Top-up Tax (QDMTT) to correspond to UK corporation tax for the purposes of various provisions in the UK taxes acts. However, whether a particular amount of income was subject to a QDMTT would depend on the facts and circumstances of each case and the relevant legislation.
This is alongside the normal operation of the Pillar Two rules which enable a jurisdiction with an Accredited QDMTT to be safe harboured from the UK’s MTT, or a jurisdiction with a QDMTT to offset a QDMTT credit against the UK’s MTT (see MTT15110).
The treatment of a QDMTT corresponding to corporation tax is relevant for the following:
- Unilateral relief arrangements (see Part 2, TIOPA 2010)
- Controlled Foreign Company creditable tax rule (see s371PA, TIOPA 2010)
- Hybrid mismatches definition of ‘foreign tax’ (see s259B, TIOPA 2010)
- Unassessed Transfer Pricing Profits ‘corresponding amount’ (see s217D, TIOPA 2010).
The Unassessed Transfer Pricing Profits has effect for accounting periods beginning on or after 1 January 2026.
Similarly, where a double taxation agreement is in place between the UK and another jurisdiction, we would expect a QDMTT to be considered a tax on income and as such a covered tax for the purpose of a double tax agreement.
When determining the creditability of foreign QDMTTs, the usual double tax relief limitations apply. For example, whether a particular amount of income was subject to a QDMTT. Guidance can be found in the International Manual.
Double tax relief
As set out in the International Manual, the UK may give its residents relief for a foreign tax either under the provisions of a double taxation agreement or unilaterally. Where relief is sought for a foreign QDMTT against UK corporation tax, further considerations are required. The following sets out some of these for unilateral relief. Similar principles may apply under the provisions of a double taxation agreement.
Unlike a QDMTT, a foreign Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR) cannot be credited against UK CT.
Allocation of QDMTT Amounts
Due to the nature of QDMTTs, the top-up amount for a blending subgroup is determined and then allocated to each entity by virtue of an allocation key. Most jurisdictions follow a default allocation key based on the adjusted profits of each entity, with the option for a single entity to elect to be liable to the whole charge.
The UK views our DTT allocation key, based on each entity’s contribution to the low effective tax rate, to be the most aligned with the underlying economic reality. However, for the purposes of double taxation relief, we will accept any just and reasonable allocation, such as an adjusted profits mechanism, to determine the amount of QDMTT allocable to a particular entity which is available for relief.
We would expect a similar allocation to apply for the purposes of the CFC, and although the question of whether a tax corresponds to UK Corporation Tax is for a purpose other than giving relief, also the Hybrids and Unassessed Transfer Pricing Profits rules. However, particular attention should be paid to the Hybrids and UTPP rules that exclude a tax from corresponding to Corporation Tax when the entity that pays the tax is different from the entity who receives the income (on which the tax is paid).
Limitations of relief
The claim for relief of a foreign QDMTT against UK corporation tax is subject to the normal limitations contained in Part 2 TIOPA 2010.
For example, if a group made an election for a single entity to be liable for the full QDMTT for a blending subgroup, we would consider this did not meet the tax minimisation rules in s33 TIOPA 2010. Instead, we would accept an amount of QDMTT based on the default allocation key in that jurisdiction. In this example, where the jurisdiction’s default allocation is based on adjusted profits then we would expect the use of an amount of QDMTT based on that allocation.
Timing of a claim
As the UK CT return for an accounting period is due 12 months after the accounting period end, which is before the return for a QDMTT are due (15 months after the accounting period end), the claim for relief will have to be made after the QDMTT amount is determined. As set out in INTM330700, the time limit for making a claim is generally 4 years and that guidance should be followed for the purposes of a claim to relief in respect of a QDMTT amount.
Interaction with foreign QDMTT and UK MTT calculations
The OECD Pillar 2 Model Rules and Commentary relating to cross-border taxes at Article 10.1 set out how CFC taxes and taxes on Permanent Establishments and Hybrids should be allocated.
Where the UK charges these taxes in relation to the income of a foreign tax resident they are generally excluded for the purpose of determining the ETR for the foreign QDMTT. As such, the double tax relief against UK CT will not impact the foreign QDMTT calculation.
In comparison the UK’s MTT will generally push these taxes down to the blending sub- group of the entity making the claim for double tax relief (see MTT25220, MTT25500, MTT25510, MTT41040, and MTT41460). Depending on the qualification level of the QDMTT, certain adjustments may need to be made:
- where a QDMTT safe harbour election is in place no adjustments are required for UK MTT as the top-up under MTT is deemed to be nil for the affected blending group and as such the changes to UK CT arising from the foreign tax credit claim are irrelevant.
- where the QDMTT is not eligible for the QDMTT safe harbour, the QDT credit mechanism will apply. As such, the top-up amount under MTT for the blending group will still need to be determined, with a credit being applied for the QDMTT charged. As the claim for double tax relief will reduce the liability of a member to a covered tax for a prior period, the rules in section 217 and MTT25300 will apply to that decrease.
QDT credit mechanism example:
In year 1, an entity which is eligible for foreign tax credit relief, is charged £1 million of UK CT. This is determined by 12 months after the accounting period end and the consolidated financial statements for Year 1 have correctly estimated this amount of UK CT.
15 months after the accounting period end the UK’s MTT and the foreign jurisdictions’ QDMTT amounts for Year 1 are determined. The MTT allows the pushdown of UK taxes on the permanent establishment, while the foreign QDMTT does not allow this pushdown. This determines an MTT amount of £250,000 and a QDMTT amount of £300,000. As such the QDMTT credit mechanism applies and no top up under the UK’s MTT is due.
However, as the amount of QDMTT has now been determined, a claim for foreign tax credit relief can be made against the UK CT liability for year 1. Assuming this claim can and is made in full, the UK CT liability for year 1 has now been reduced to £700,000 (£1,000,000 UK CT less £300,000 foreign QDMTT).
Therefore, for the purposes of the UK’s MTT, there has been a decrease in the liability of a member to a covered tax for a prior period. As such, the UK’s MTT calculation for Year 2 will apply the prior period tax adjustment rules in section 217 (MTT25300) and could require a recalculation of the effective tax rate and MTT top-up amount for year 1. This would lead to a larger amount of MTT for year 1. It is possible that even with this increase in MTT calculated, the QDMTT is still larger and so the QDMTT credit mechanism still reduces the MTT to nil. However, if this isn’t the case and the increase in MTT now means that the top-up amount under the UK’s MTT is larger than the foreign QDMTT amount then the QDMTT credit mechanism will only credit the difference and so an amount of MTT will remain chargeable. This will be reflected as an additional top-up amount in Year 2 under the UK’s MTT.