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HMRC internal manual

Savings and Investment Manual

HM Revenue & Customs
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Dividends and other company distributions: tax credits on foreign distributions: eligibility to foreign tax credit relief

Tax credits: foreign distributions

Tax credits under ITTOIA05/S397A have no impact on a person’s eligibility to foreign tax credit relief.

Higher rate taxpayers subject to the dividend upper rate of 32.5% who have had foreign withholding tax deducted in the source country of the dividend can benefit from both the dividend tax credit and foreign tax credit relief. Where withholding tax is levied at a higher rate than specified in the double tax treaty, foreign tax credit relief is calculated on the dividend amount exclusive of the dividend tax credit.

However, because the dividend tax credit is set at a level which completely extinguishes any liability to income tax for basic rate taxpayers, in practice basic rate taxpayers will not get any benefit from foreign tax credit relief where the dividend tax credit attaches to a dividend. Excess credits are lost; they are not repayable and cannot be offset against other income tax liabilities.

Overseas tax deducted from payments of manufactured overseas dividends (MODs) is treated as foreign tax - see CFM74450 (or CFM 74370 for payments before 01 January 2014).