D4.1008 Banks and other financial traders: Pre 16 March 2005
The legislation described below was repealed by FA 2005, s 86 for claims arising in respect of foreign tax paid on or after 16 March 2005 or income received on or after that date in respect of which foreign tax has been deducted at source. Legislation was instead introduced which applies to companies and individuals in all industry sectors with trading income that is subject to foreign tax. (See E6.434).
The details below outline the background and treatment of the position before 16 March 2005.
In 1982 special provisions were introduced restricting the amount of double taxation relief which could be claimed by banks engaged in overseas lending and other financial traders. Generally, when banks (and other financial traders) lend to non-residents they are subject to UK corporation tax only on the net profit from the transaction (ie interest receivable less interest expense). However, the interest received may be subject to a withholding tax at a fixed percentage of the gross amount in accordance with the laws of the country of the borrower (as modified by the provisions of a double taxation agreement, if applicable).
Prior to the 1982 provisions, UK resident banks (or UK branches of foreign banks) were entitled to set the full amount of the foreign tax against their UK corporation tax liabilities in respect of their profits as a whole. In this way they were able to lend at lower rates than they would otherwise have been able to,