DOUBLE TAX RELIEF

1
DOUBLE TAX RELIEF

• available unilaterally or under Treaty
• credit given for foreign tax limited to UK tax on
  same profits
• relief available for underlying tax
• available only if dividend received from
  related overseas company (50) or under DTT
• relief given for tax paid on the relevant
  profits out of which the dividend is paid

2
TA 1988 s792(1) underlying tax means, in
relation to any dividend, tax which is not
chargeable in respect of that dividend directly
or by deduction
3
MIXER COMPANIES

• Restriction of relief to UK tax might result in
  dividends from high rate countries not being
  fully relieved while dividends from low tax
  countries would have UK tax still to pay
• attraction therefore to mix high and low rates
  through a mixer company
• had become commonly used with Holland being a
  popular location
• could involve an ADP dividend from a CFC
• attacked in FA 2000

4
Country X Country Y Mixer Profits 2,000,0
00 4,000,000 6,000,000 Overseas
tax 1,400,000 1,000,000 2,400,000 Dividend
paid to UK 600,000 3,000,000 3,600,000 Underly
ing tax 1,400,000 1,000,000 2,400,000 Gross 2,
000,000 4,000,000 6,000,000 UK corporation tax
(30) 600,000 1,200,000 1,800,000 Credit for
foreign tax (600,000) (1,000,000)
(1,800,000) UK tax payable NIL
200,000 NIL Unused foreign tax credits
800,000 600,000
5
FA 2000 CHANGES

• relief for overseas tax will be capped at 30
• mixing with dividends from CFCs relying on the
  distribution exemption will not be permitted
• a pooling of other overseas dividends will be
  allowed with underlying tax up to 45
• excess credit can be carried back 3 years or
  carried forward indefinitely against the same
  pool
• a form of group relief will also be available for
  excess credits

6
MIXER CAP

• S 799(1A)
• INTM164220
• Applies only to underlying tax
• relief limited to stated formula
• does not apply to dividends mixed within same
  country
• ADP dividends segregated out from 2001
• relief for excess credits

7
LIMIT ON OVERSEAS TAX
(D U) x M D Dividend U underlying
overseas tax M maximum relievable rate (UK
corporation tax rate at time dividend is paid)
8
UK
140
BV
80
60
H 100-40
L 100-20
9
Dividend Tax attributable Mixer cap
formula Credit allowable L to
BV 20 (80 20) x 30 30 20 H to
BV 40 (60 40) x 30 30 30 BV to
UK 60 (140 60) x 30 60 60
Although the mixer cap would allow a maximum of
60 if only the final dividend from BV to the UK
were considered, because the mixer cap has also
been applied to each component dividend the
maximum credit is restricted to 20 and 30, total
50. There will be an additional 10 tax payable on
the part of the final Case V dividend that
represents the dividend from L. Case V income
(gross) 200 UK corporation tax
60 DTR (50) Tax payable 10 Eligible
unrelieved foreign tax 10 (60 -50)
INTM164230
10
UK has a subsidiary A in country A that in turn
holds three subsidiaries B pays a dividend to A
of 85 in respect of which it has paid underlying
tax of 15 C pays a dividend to A of 100 in
respect of which there is nil underlying tax but
10 withholding tax is payable D pays a dividend
to A of 60 in respect of which it has suffered
underlying tax of 40. A then pays a dividend of
235 up to the UK.
11
UK
235
A
100-10
60
85
B a CFC paying an ADP
C a CFC with exempt activity
D trading company
12
(D U) x M Company D Company C (6040) x 30
30 (limit) (9010) x 30 30
(limit) actually paid 40 actually
paid 10 relieved 30
relieved 10 excess 10
excess - EUFT NB if D had
incurred tax of 50 the EUFT would have been 15
(ie 45 -30)
13
Case V Computation ADP dividend 85
Residual dividend (235-85) 150 Underlying tax
15 Underlying tax (10 40) 50
Gross dividend 100 Gross dividend 200
CT 30 CT _at_ 30
60 DTR (15) DTR
(10 30) (40) Net UK tax
15 Net UK tax 20 Eligible
unrelieved foreign tax (EUFT) 10
14
PRE FA 2000 POSITION
Dividend received 235 Underlying tax
(151040) 65 Case V income 300 Corporation
tax _at_ 30 90 DTR (65) Tax payable
25
15
2009 Proposals
Change from taxing foreign dividends and
relieving double taxation through crediting
foreign tax, towards an exemption from taxation
on certain dividends Replace CFC rules with
a controlled company (CC) regime, which would
be an income-based regime under which the
mobile or passive income of all 10 per cent
subsidiaries of large and medium-sized
UK-resident companies would be taxed in the
United Kingdom To change the current regime
in respect of interest relief for the costs of
funding foreign activities and profits