Section 17: Rule 9: credit in relation to dividends for spared tax
66.This section specifies when, in principle, unilateral credit relief is allowed in relation to dividends for spared tax. It is based on section 790(10A) to (10C) of ICTA.
67.Section 790(10A) of ICTA gives unilateral relief in cases in which:
a UK resident company (company C) would have been entitled under a DTA to credit relief in relation to dividends for spared tax if it had invested directly in a non-UK resident company (company A); but
instead company C invests in company A through a holding company resident in the same non-UK territory (company B).
68.Subsection (1) is based on section 790(10A) of ICTA. Section 790(10A)(d) reads:
“the circumstances are such that, had company B been resident in the United Kingdom, it would have been entitled, under arrangements made in relation to the territory outside the United Kingdom and having effect by virtue of section 788, to a relief to which subsection (5) of that section applies in respect of the spared tax.”
69.A relief to which section 788(5) of ICTA applies is a tax relief, given for development purposes, under the law of the non-UK territory to which the DTA under review relates. See the second sentence of section 788(5). Accordingly, a relief to which section 788(5) applies is not a UK tax relief to which a person is entitled under a DTA. It is a foreign tax relief with respect to which provision is made in a DTA for DTR.
70.Accordingly, if company B had been resident in the United Kingdom, it would not have been entitled to a relief to which section 788(5) of ICTA applies. Rather, it would have been entitled to treat the spared tax as having been payable for the purposes of DTR by way of credit. Foreign tax is spared as a result of a relief to which section 788(5) applies. But entitlement to treat the spared tax as having been payable arises under the first sentence of section 788(5).
71.Section 790(10A)(a) to (d) of ICTA therefore address the following case. Company A receives a tax relief under the law of the non-UK territory in which it is resident. It pays a dividend out of the relieved profits to company B, which is resident in the same non-UK territory. Company B, out of the dividend received from company A, pays a dividend to UK resident company C. There is a DTA in relation to the non-UK territory the effect of which, when read with section 788(5) of ICTA, is that if company B was UK resident it would be entitled, for the purposes of DTR by way of credit to treat as payable the non-UK tax which company A would have paid but for the non-UK tax relief. Subsection (1)(d) is drafted accordingly.
72.Section 790(10B)(b) of ICTA refers to section 795(3) of that Act, which is rewritten to sections 31(4) and 32(5). Subsection (2), which is based on section 790(10B)(b), refers to section 31(4). But subsection (2) does not refer to section 32(5), because section 790(10B) concerns the corporation tax liability of a UK resident company and section 32 has no application for corporation tax purposes.
73.The tail words of section 790(10C) of ICTA contain the proviso:
“(notwithstanding any arrangements … which have effect by virtue of section 788 and provide for a relief to which subsection (5) of that section applies).”
74.As noted in the commentary on subsection (1), a relief to which section 788(5) of ICTA applies is given under foreign law, not under a DTA. Accordingly, in the tail words of section 790(10C) of ICTA, “provide for” is elliptic drafting for “make provision with respect to”. Subsection (5) is drafted accordingly.
