Income and Corporation Taxes Act 1988

803 Underlying tax reflecting interest on loans.U.K.

M1(1)This section applies in a case where—

(a)a bank or a company connected with a bank makes a claim for an allowance by way of credit in accordance with this Chapter; and

(b)the claim relates to underlying tax on a dividend [F1 (“the overseas dividend")] paid by the overseas company, within the meaning of section 801; and

(c)that underlying tax is or includes tax payable under the law of a territory outside the United Kingdom on or by reference to [F2interest or dividends earned or received] in the course of its business by that overseas company or by such third, fourth or successive company as is referred to in subsection (2) or (3) of that section; and

[F3(d)if the company which received the interest or dividends (“the company") had been resident in the United Kingdom, section 798 would apply in relation to that company.]

(2)In a case where this section applies, the amount of the credit for that part of the foreign tax which consists of the tax referred to in subsection (1)(c) above shall not exceed an amount determined under subsection (3) below.

(3)The amount referred to in subsection (2) above is a sum equal to corporation tax, at the rate in force at the time the foreign tax referred to in paragraph (c) of subsection (1) above was chargeable, [F4on so much of the interest or dividends as exceeds the amount of the company’s relevant expenditure which is properly attributable to the earning of the interest or dividends].

(4)In subsection (3) above—

(a)“interest”, subject to subsection (5) below, has the meaning assigned to it by [F5section 798(3)]; and

[F6(b)“the company"s relevant expenditure’ means the amount which, if the company referred to in subsection (1)(d) above were resident in the United Kingdom and were a qualifying taxpayer for the purposes of section 798, would be its financial expenditure in relation to the earning of the interest or dividends, as determined in accordance with section 798B.]

(5)If, in accordance with subsection (6) or subsection (8) below, the amount of [F7the overseas dividend] would be treated for the purposes of corporation tax as increased or reduced by any amount, then the amount which, apart from this subsection, would be the amount of [F8the interest or dividends] referred to in subsection (3) above shall be taken to be increased or reduced by the same amount as [F7the overseas dividend] is so treated as increased or reduced.

(6)If, in a case where this section applies, the underlying tax is or includes an amount of spared tax, then, for the purposes of corporation tax, the amount which apart from this subsection would be the amount of [F9the overseas dividend] shall be treated as increased by an amount equal to so much of that spared tax as does not exceed—

[F10(a)the amount of the spared tax which under any arrangements is to be taken into account for the purpose of allowing credit against corporation tax in respect of the overseas dividend; or

(b)if it is less, 15 per cent. of the interest or dividends;]

but nothing in this subsection prejudices the operation of section 795 in relation to foreign tax which is not spared tax.

[F11(7)In this section “spared tax” has the same meaning as in section 798A.]

(8)If, in a case where this section applies—

(a)the underlying tax is or includes an amount of tax which [F12is referable to interest and] is not spared tax, and

(b)that amount of tax exceeds 15 per cent. of the interest to which it is referable,

then, for the purposes of corporation tax, the amount which would apart from this subsection be the amount of [F13the overseas dividend] shall be treated as reduced by a sum equal to the excess.

(9)Where this section applies, the amount of the credit referred to in paragraph (a) of subsection (1) above which is referable to the underlying tax payable as mentioned in paragraph (c) of that subsection shall not exceed 15 per cent. of so much of [F14the interest or dividends] referred to in that paragraph as is included in the relevant profits of the company paying [F15the overseas dividend]; and for the purposes of this subsection—

(a)“relevant profits” has the same meaning as, by virtue of section 799, it has for the purposes of the computation of underlying tax; and

(b)the amount of [F14the interest or dividends] shall be determined without making any deduction in respect of any foreign tax.

[F16(10)In subsection (1) above “bank” means a company carrying on, in the United Kingdom or elsewhere, any trade which includes the receipt of interest or dividends, and section 839 applies for the purposes of that subsection.]