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DOUBLE TAX RELIEF

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					        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
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;
         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
                             Country X    Country Y       Mixer
Profits                      2,000,000    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
Underlying 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
          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
               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
  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)
                UK

          140

                BV



60                         80

     H                 L
 100-40              100-20
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
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.
                UK

          235

                A


                 100-10
85                            60

     B          C         D
 a CFC      a CFC       trading
 paying     with       company
 an ADP     exempt
            activity
(D +U) x M%

Company D                        Company C
(60+40) x 30% = 30 (limit)    (90+10) 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)
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 @ 30%                  60
DTR                   (15)           DTR (10 + 30)            (40)
Net UK tax            15             Net UK tax                20


             Eligible unrelieved foreign tax (EUFT) = 10
   PRE FA 2000 POSITION
Dividend received           235
Underlying tax (15+10+40)    65
Case V income               300

Corporation tax @ 30%        90
DTR                         (65)
Tax payable                  25
               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

				
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