Finance Act 1998

Double taxation relief

103Restriction of relief on certain interest and dividends

(1)For section 798 of the Taxes Act 1988 there shall be substituted the following section—

“798Restriction of relief on certain interest and dividends

(1)This section applies where—

(a)in any chargeable period the profits of a trade carried on by a qualifying taxpayer include an amount computed in accordance with section 795 in respect of foreign interest or foreign dividends;

(b)the taxpayer is entitled in accordance with this Chapter to credit for foreign tax on the foreign interest or foreign dividends; and

(c)in the case of foreign dividends, the foreign tax mentioned in paragraph (b) above is or includes underlying tax.

(2)The amount of the credit for foreign tax referred to in subsection (1)(b) above which, in accordance with this Chapter, is to be allowed against income tax or corporation tax—

(a)shall be limited by treating the amount of the foreign interest or foreign dividends (as increased or reduced under section 798A) as reduced (or further reduced) for the purposes of this Chapter by an amount equal to the taxpayer’s financial expenditure in relation to the interest or dividends (as determined in accordance with section 798B); and

(b)so far as the credit relates to foreign tax on interest or foreign tax on dividends which is not underlying tax, shall not exceed 15 per cent. of the interest or dividends, computed without regard to paragraph (a) above or to any increase or reduction under section 798A.

(3)In this section and sections 798A and 798B—

• “interest”, in relation to a loan, includes any introductory or other fee or charge which is payable in accordance with the terms on which the loan is made or is otherwise payable in connection with the making of the loan;

• “foreign dividends” means dividends payable out of or in respect of the stocks, funds, shares or securities of a body of persons not resident in the United Kingdom;

• “foreign interest” means interest payable by a person not resident in the United Kingdom or by a government or public or local authority in a country outside the United Kingdom.

(4)In this section and section 798B “qualifying taxpayer” means, subject to subsection (5) below, a person carrying on a trade which includes the receipt of interest or dividends and is not an insurance business.

(5)Where a company which is connected or associated with a qualifying taxpayer is acting in accordance with a scheme or arrangement the purpose, or one of the main purposes, of which is to prevent or restrict the application of this section to the taxpayer—

(a)the company shall be treated for the purposes of this section as a qualifying taxpayer; and

(b)any foreign interest or foreign dividends received in pursuance of the scheme or arrangement shall be treated for those purposes as profits of a trade carried on by the company.

(6)For the purposes of this section and section 798B—

(a)section 839 applies; and

(b)subsection (10) of section 783 applies as it applies for the purposes of that section.”

(2)This section and sections 104 and 105 do not have effect in relation to foreign interest or foreign dividends paid before 1st January 1999 in pursuance of arrangements which were entered into before, and are not altered on or after, 17th March 1998.

(3)Subject to subsection (2) above, this section and sections 104 and 105 have effect in relation to foreign interest or foreign dividends paid on or after 17th March 1998.

104Adjustments of interest and dividends for spared tax etc

After section 798 of the Taxes Act 1988 there shall be inserted the following section—

“798AAdjustments of interest and dividends for spared tax etc

(1)In a case where section 798 applies—

(a)subsection (2) below applies if the foreign tax referred to in subsection (1)(b) of that section is or includes an amount of spared tax; and

(b)subsection (3) below applies if the foreign tax so referred to is or includes an amount of tax which is not spared tax.

(2)For the purposes of income tax or corporation tax, the amount which apart from this subsection would be the amount of the foreign interest or foreign dividends shall be treated as increased by so much of the spared tax as does not exceed—

(a)the amount of the spared tax for which, in accordance with any arrangements applicable to the case in question, credit falls to be given as mentioned in section 798(1)(b); or

(b)if it is less, 15 per cent. of the interest or dividends, computed without regard to any increase under this subsection.

(3)If the amount of tax which is not spared tax exceeds—

(a)the amount of the credit which, by virtue of this Chapter (but disregarding subsection (2) of section 798), is allowed for that tax against income tax or corporation tax; or

(b)if it is less in the case of tax on foreign interest, 15 per cent. of the interest, computed without regard to any increase or reduction under this section or that subsection,

then, for the purposes of income tax or corporation tax, the amount which, apart from this subsection, would be the amount of the foreign interest or foreign dividends shall be treated as reduced by a sum equal to the excess.

(4)Subsection (2) above has effect for the purposes of corporation tax notwithstanding anything in section 80(5) of the [1996 c. 8.] Finance Act 1996 (matters to be brought into account in the case of loan relationships only under Chapter II of Part IV of that Act).

(5)Nothing in subsection (2) above prejudices the operation of section 795 in relation to foreign tax which is not spared tax.

(6)In this section “spared tax” means foreign tax which although not payable falls to be taken into account for the purposes of credit by virtue of section 788(5).”

105Meaning of “financial expenditure”

After section 798A of the Taxes Act 1988 there shall be inserted the following section—

“798BMeaning of “financial expenditure”

(1)For the purposes of section 798 “financial expenditure”, in relation to a qualifying taxpayer and any interest or dividends is, subject to the provisions of this section, the aggregate of—

(a)so much of the financial expenses (consisting of interest, discounts or similar sums or qualifying losses) incurred by the taxpayer or a person connected or associated with him as—

(i)is properly attributable to the earning of the interest or dividends; and

(ii)falls to be taken into account in computing the taxpayer’s or person’s liability to income tax or corporation tax; and

(b)so much of any other sum paid by the taxpayer or a person connected or associated with him which—

(i)falls to be taken into account as mentioned in paragraph (a) above; and

(ii)would not, apart from this paragraph, be taken into account in determining the amount of the interest or dividends,

as it is reasonable to regard as attributable to the earning of the interest or dividends (whether or not it would fall, in accordance with normal accountancy practice, to be so treated).

(2)There shall be deducted from the aggregate given by subsection (1) above so much of the qualifying gains and profits accruing to the qualifying taxpayer or a person connected or associated with him as—

(a)is properly attributable to the earning of the interest or dividends; and

(b)falls to be taken into account in computing the taxpayer’s or person’s liability to income tax or corporation tax.

(3)In a case where the amount of a qualifying taxpayer’s financial expenditure in relation to the earning of the interest or dividends is not readily ascertainable—

(a)that amount shall be taken, subject to subsection (4) below, to be such sum as it is just and reasonable to attribute to the earning of the interest or dividends; and

(b)in the case of interest, regard shall be had in particular to any market rates of interest by reference to which the rate of the interest is determined.

(4)The Board may by regulations supplement subsection (3) above—

(a)by specifying matters to be taken into account in determining such a just and reasonable attribution as is referred to in paragraph (a); and

(b)by making provision with respect to the determination of market rates of interest for the purposes of paragraph (b);

and any such regulations may make different provision for different cases.

(5)In this section “qualifying losses” means—

(a)losses falling to be brought into account for the purposes of Chapter II of Part II of the [1993 c. 34.] Finance Act 1993 (exchange gains and losses) in accordance with sections 125 to 127 of that Act; and

(b)losses falling to be brought into account for the purposes of Chapter II of Part IV of the [1994 c. 9.] Finance Act 1994 (interest rate and currency contracts) in accordance with sections 155 to 158 of that Act;

and “qualifying gains” and “qualifying profits” shall be construed accordingly.”

106Underlying tax reflecting interest or dividends

(1)Section 803 of the Taxes Act 1988 (underlying tax reflecting interest on loans) shall be amended as follows.

(2)In subsection (1)—

(a)in paragraph (b), after the words “a dividend” there shall be inserted the words “(“the overseas dividend”)”;

(b)in paragraph (c), for the words “interest on a loan made” there shall be substituted the words “interest or dividends earned or received”; and

(c)for paragraph (d) there shall be substituted the following paragraph—

“(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.”

(3)In subsection (3), for the words from “on so much” to the end there shall be substituted the words “on 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 (4)—

(a)in paragraph (a), for the words “section 798(2)” there shall be substituted the words “section 798(3)”;

(b)for paragraph (b) there shall be substituted the following paragraph—

“(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)In subsection (5)—

(a)for the words “the dividend”, in both places where they occur, there shall be substituted the words “the overseas dividend”; and

(b)for the words “the interest” there shall be substituted the words “the interest or dividends”.

(6)In subsection (6)—

(a)for the words “the dividend” there shall be substituted the words “the overseas dividend”; and

(b)for the words “the permitted amount” there shall be substituted the following paragraphs—

“(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;”.

(7)For subsection (7) there shall be substituted the following subsection—

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

(8)In subsection (8)—

(a)after the words “amount of tax which” there shall be inserted the words “is referable to interest and”; and

(b)for the words “the dividend” there shall be substituted the words “the overseas dividend”.

(9)In subsection (9)—

(a)for the words “the interest”, in both places where they occur, there shall be substituted the words “the interest or dividends”; and

(b)for the words “the dividend” there shall be substituted the words “the overseas dividend”.

(10)For subsections (10) and (11) there shall be substituted the following subsection—

“(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.”

(11)This section does not apply where the overseas dividend is paid before 1st January 1999 in pursuance of arrangements which were entered into before, and are not altered on or after, 17th March 1998.

(12)Subject to subsection (11) above, this section applies where the overseas dividend is paid on or after 17th March 1998.

107Notification of foreign tax adjustment

(1)In section 806 of the Taxes Act 1988 (supplemental provision with respect to double taxation relief), after subsection (2) there shall be inserted the following subsections—

“(3)Subject to subsection (5) below, where—

(a)any credit for foreign tax has been allowed to a person under any arrangements, and

(b)the amount of that credit is subsequently rendered excessive by reason of an adjustment of the amount of any tax payable under the laws of a territory outside the United Kingdom,

that person shall give notice in writing to an officer of the Board that an adjustment has been made that has rendered the amount of the credit excessive.

(4)A notice under subsection (3) above must be given within one year from the time of the making of the adjustment.

(5)Subsections (3) and (4) above do not apply where the adjustment is one the consequences of which in relation to the credit fall to be given effect to in accordance with regulations made under—

(a)section 182(1) of the [1993 c. 34.] Finance Act 1993 (regulations relating to individual members of Lloyd's); or

(b)section 229 of the [1994 c. 9.] Finance Act 1994 (regulations relating to corporate members of Lloyd's).

(6)A person who fails to comply with the requirements imposed on him by subsections (3) and (4) above in relation to any adjustment shall be liable to a penalty of an amount not exceeding the amount by which the credit allowed has been rendered excessive by reason of the adjustment.”

(2)This section shall be deemed to have come into force on 17th March 1998 in relation to adjustments made on or after that date.