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HMRC internal manual

Savings and Investment Manual

Dividends and other company distributions: tax credits on foreign distributions: eligibility to foreign tax credit relief: tax years up to 2015-16

Tax credits: foreign distributions: tax years up to 2015-16

Tax credits under ITTOIA05/S397A had 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 had foreign withholding tax deducted in the source country of the dividend could benefit from both the dividend tax credit and foreign tax credit relief. Where withholding tax was levied at a higher rate than specified in the double tax treaty, foreign tax credit relief was calculated on the dividend amount exclusive of the dividend tax credit.

In practice basic rate taxpayers could not get any benefit from foreign tax credit relief where the dividend tax credit attached to a dividend. This was because the dividend tax credit was set at a level which extinguished any liability to income tax for basic rate taxpayers. Excess credits were lost; they were not repayable and could not be offset against other income tax liabilities.

Overseas tax deducted from payments of manufactured overseas dividends (MODs) was treated as foreign tax - see CFM74450 (or CFM74370 for payments before 1 January 2014).