If a person has income or gains from a source in one country and is resident in another, that same income or gain can suffer tax twice. Double Tax Relief (DTR) is designed to alleviate this double charge on the same source of income or gain.
The UK provides three options for providing relief from double taxation – two via a form of tax credit and one by way of deduction from the profits of the business.
Of the two forms that provide relief via a tax credit, one is called unilateral relief which is provided under UK domestic legislation and the other is provided through double tax treaties with other countries. The precise mechanism for relief under a double tax agreement will vary from treaty to treaty.
DTR will generally be available if the UK resident is receiving royalties or interest from abroad and withholding tax has been suffered.
The position for dividends is different for UK companies compared to other UK residents. The majority of dividends received by a UK company from an overseas subsidiary are exempt from UK corporation tax. As a result, double tax relief is not relevant. However, where the exemption is not available, and dividends are therefore taxable, double tax relief is available in respect of any withholding taxes incurred. Relief is also available for underlying tax suffered on the profits out of which the subsidiary pays a dividend, provided the UK company holds at least 10% of the voting power in the subsidiary.
Credit relief is available on foreign tax incurred on business profits or gains provided that the foreign tax suffered corresponds with UK income tax, capital gains tax or corporation tax in relation to profits or gains.
Foreign turnover taxes (i.e. taxes that are calculated as a proportion of gross income) and taxes that have characteristics similar to turnover taxes are generally excluded.
The UK has a wide network of comprehensive double tax treaties with other countries.
Double tax relief under a double tax treaty is normally given via one of the following ways:
To obtain relief, it is necessary to be resident in one of the countries that is party to the treaty. Where the claimant is dual resident (i.e. resident in both countries under their respective domestic laws), the treaty itself will determine the individual's country of residence purely for the purposes of that treaty.
Unilateral relief is a form of credit relief and may be available if relief is not available under a double tax treaty (for example where there is no double tax treaty between the UK and the other country or where the particular category of income or gain is not covered in the treaty).
Under unilateral relief, the amount of DTR is calculated on a source by source basis. The basic rule is that the relief available is the lower of the UK tax due on that source of income and the foreign tax suffered. The foreign income must be recalculated using UK tax principles to determine the UK tax arising which is to be relieved by way of credit.
In determining credit relief, it is possible to choose how to allocate certain types of allowable deductions, such as losses and (for UK companies) management expenses and qualifying charitable donations.
It is normally beneficial to allocate such deductions to the UK source income in preference to the overseas income. This helps maximise the amount of credit relief given in the UK on the foreign income or gains.
Where credit relief is not claimed, it is possible to take a deduction from income for the foreign tax instead. No separate claim for deduction is required – it applies automatically where a claim for credit is not made.
Expensing the foreign tax is usually done in circumstances where a company cannot benefit from credit relief. This could arise, for example, where the company has excess losses or where there is another form of relief that reduces the taxable income or gain to nil.
Corporate interest restriction ― calculating tax-interest expense amounts and tax-EBITDAWhy do we need to calculate these amounts?This guidance note sets out details of the initial calculations a group will need to undertake for the purposes of the corporate interest restriction (CIR) regime. For a general overview of the regime, see the Corporate interest restriction ― overview guidance note.The first step to take when looking at the CIR is to calculate the aggregate net tax-interest expense for all companies in a worldwide group within the charge to UK corporation tax. In order to do this, it is necessary to calculate the net tax-interest expense (or income) for each relevant company and then sum these amounts. Details of how to go about this are set out under ‘Calculating tax-interest expense amounts’ below. Net tax-interest expense is also required to calculate tax-EBITDA.In order to undertake the CIR calculations in both the fixed ratio method (see the Corporate interest restriction ― fixed ratio method guidance note) and the group ratio method (see the Corporate interest restriction ― group ratio method guidance note), it is first necessary to calculate tax-EBITDA for each relevant company. Again, these figures are the aggregate for the worldwide group. Aggregate tax-EBITDA is the amount to which the fixed ratio (30%) or, if an election is made, the variable group ratio percentage (GRP) is applied when calculating a group’s interest allowance for a given period of account. Details of how to do this are
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