»Ê¹ÚÌåÓýapp

»Ê¹ÚÌåÓýapp following examples illustrate the relief described in INTM256230 to INTM256310. (»Ê¹ÚÌåÓýapp rates of tax used in the examples have been set in order to help illustrate various aspects of the legislation, rather than always being actual rates.)

Example 1

A Ltd is a United Kingdom company with a wholly owned subsidiary X which is a controlled foreign company. A Ltd is subject to an apportionment under Chapter IV for the year ended 31 March, in respect of chargeable profits of X totalling £100,000 with no creditable tax. »Ê¹ÚÌåÓýapp liability is

-	£
Chargeable profits	100,000
Tax @ 45 % in respect of chargeable profits	45,000
Less creditable tax	NIL
Tax charged	45,000

On the following 1 June, A Ltd receives a dividend of £45,000 from X paid out of the latter’s relevant profits of £120,000 for the period for which A Ltd was assessed as above.

»Ê¹ÚÌåÓýapp liability of A Ltd on the dividend is

-	£
Dividend received	45,000
Corporation tax @ 30 %	13,500
Less Chapter IV tax treated as underlying tax (see below)	13,500
Net payable	NIL

»Ê¹ÚÌåÓýapp Chapter IV tax which qualifies for credit is:-

£45,000 × £45,000/120,000 = £16,875

computed in accordance with ICTA88\S799 (1) and (2). »Ê¹ÚÌåÓýapp relief is, however, limited to the Corporation Tax chargeable on the dividend that is, £13,500 in accordance with ICTA88\S797 and excess Chapter IV tax of £3,375 cannot be relieved in any way.

Example 2

»Ê¹ÚÌåÓýapp facts are as in Example 1 except that X has creditable tax of £10,000 so that its profits available for distribution are £110,000. »Ê¹ÚÌåÓýapp liability of A Ltd under Chapter IV is

-	£
Chargeable profits	100,000
Tax @ 45 %	45,000
Less creditable tax	10,000
Tax Charged	35,000

»Ê¹ÚÌåÓýapp liability on the subsequent dividend is

-	-	£
Dividend received	-	45,000
Grossing for foreign tax 10,000 × 45,000/110,000	-	4,091
Amount chargeable	-	49,091
Corporation tax @ 30%	-	14,727
Double taxation relief	4,091	-
Chapter IV tax treated as underlying tax	10,636	14,727
Net payable	-	NIL

»Ê¹ÚÌåÓýapp Chapter IV tax which qualifies for relief is

£35,000 × 45,000/110,000 = £14,318

However, the total double taxation relief available to A Ltd is limited under ICTA88/S797 to the Corporation Tax charged on the dividend.

Example 3

»Ê¹ÚÌåÓýapp facts are as in Example 1 except that 13 months later on 1 May, A Ltd sells 25% of its shareholding in X to another United Kingdom company. It makes no claim under ICTA88/SCH26/PARA3. »Ê¹ÚÌåÓýapp liability of A Ltd in respect of the dividend is

-	£
Dividend received £45,000 x 75/100	33,750
Corporation tax @ 30%	10,125
Less Chapter IV tax	10,125
Net payable	NIL

»Ê¹ÚÌåÓýapp Chapter IV tax which qualifies for relief is

£45,000 × 75/100 × 45,000/110,000 = £13,806.82

but the limit on credit rule applies as in the earlier examples.

»Ê¹ÚÌåÓýapp liability in respect of the dividend on the purchaser of the shares in X is

-	£
Dividend received £45,000 x 25/100	11,250
Corporation tax @ 30%	3,375
Less Chapter IV tax	3,375
Net payable	NIL

»Ê¹ÚÌåÓýapp purchaser is entitled to credit for Chapter IV tax paid by A Ltd (see INTM256250). »Ê¹ÚÌåÓýapp tax available to the purchaser for relief is

£45,000 × 25/100 x 45,000/110,000 = 4,602.28

but the limit on credit rule again applies.

Example 4

P Ltd, a United Kingdom company has a wholly-owned, non-resident subsidiary Q. Q has a wholly owned subsidiary R which is a controlled foreign company. R has chargeable profits of £200,000 and creditable tax of £10,000 in respect of which P Ltd is assessed under Chapter IV for the year ended 31 March Year 1. »Ê¹ÚÌåÓýapp Chapter IV liability is

-	£
Chargeable Profits	200,000
Tax @ 35 %	70,000
Less creditable tax	10,000
Net payable	60,000

In the year ended 31 March Year 3, R pays a dividend of £150,000 to Q out of its relevant profits for the year ended 31 March Year 1 of £300,000, namely, half of the profits available for distribution. Q is charged tax of £10,000 on the dividend and pays the balance of the dividend, that is, £140,000 to P Ltd as a dividend. To compute the liability of P Ltd in respect of the dividend the following steps are required:

1. »Ê¹ÚÌåÓýapp tax paid by Q in respect of its profits (that is, £10,000) is treated as underlying tax in accordance with ICTA88/S801(1)(b).
2. »Ê¹ÚÌåÓýapp tax paid by R in respect of that part of its profits now paid to Q as a dividend (that is, £10,000 × ½ = £5,000) is treated as tax paid by Q in accordance with ICTA88/S801(2).
3. »Ê¹ÚÌåÓýapp tax paid by P Ltd under Chapter IV is treated as underlying tax.
4. »Ê¹ÚÌåÓýapp dividend received by P Ltd is increased by the amounts in (a) and (b) above but not by the Chapter IV Tax in (c).

Assuming a corporation Tax rate of 30% the liability of P Ltd in respect of the dividend is

-	-	-	£
Dividend received	-	-	140,000
Add tax paid by Q	-	-	10,000
tax paid by R	-	-	5,000
Amount assessable	-	-	155,000
Corporation Tax @ 30%	-	-	46,500
Less double taxation relief	-	-	-
tax paid by Q	-	10,000	-
tax paid by R	-	5,000	-
Chapter IV tax	60,000 × ½	30,000	45,000
net payable	-	-	1,500

Example 5

»Ê¹ÚÌåÓýapp facts are as in Example 1 except that on payment of the dividend of £45,000 to A Ltd X deducts tax at the rate of 20% so that the net amount received by A Ltd is £36,000. Its liability is

-	-	£
Dividend received	-	36,000
Foreign withholding tax	-	9,000
Amount assessable	-	45,000
Corporation Tax @ 30%	-	13,500
Chapter IV tax (see example 1)	16,875	-
Foreign withholding tax	9,000	-
Double taxation relief available	25,875	-
restricted to	-	13,500
-	-	NIL

»Ê¹ÚÌåÓýapp excess of double taxation relief over the Corporation Tax payable on the dividend up to the amount of the withholding tax (that is, £9,000) is “wasted reliefâ€� in accordance with paragraph INTM256290. If A Ltd so claims, its Chapter IV liability for the year ended 31 March is reduced by that amount and £9,000 is repaid, as appropriate.

Example 6

Controlled foreign company Z has chargeable profits of £110,000 and creditable tax of £10,000 for the year ended 31 March Year 1. »Ê¹ÚÌåÓýapp chargeable profits are apportioned £66,000 to a United Kingdom company G Ltd, which self assesses under Chapter IV for its own accounting period to 31 March Year 1 and £44,000 to non-residents.

»Ê¹ÚÌåÓýapp tax in respect of the chargeable profits apportioned to G Ltd is

-	£
Tax on chargeable profits (£66,000 @ 30%)	19,800
Less Apportioned creditable tax (60% of £10,000)	6,000
Tax assessed	13,800

In the year to 31 March Year 2, the controlled foreign company pays a dividend £60,000 for the year to 31 March Year 2, representing one half of the relevant profits of £120,000, and £36,000 (60% of £60,000) is paid to G Ltd. »Ê¹ÚÌåÓýapp tax liability on the dividend is

-	£
Dividend	36,000
Add Foreign tax (60% of ½ ×£10,000)	3,000
Income	39,000
Corporation Tax at 30%	11,700
Less Underlying relief for foreign tax	3,000
-	8,700
Less Relief for Chapter IV tax ½ × 13,800	6,900
Tax chargeable	1,800

Since part of the chargeable profits of Z were apportioned to persons other than United Kingdom companies and the dividend was not paid out of specified profits, the rules at INTM256300 apply. »Ê¹ÚÌåÓýapp dividend paid to G Ltd is regarded as paid primarily out of the ‘taxed profitsâ€� of Z so that the Chapter IV tax charged on G Ltd is attributed to the dividend which is received and not to the dividends paid by Z to non-residents.