CFM95680 – Corporate Finance Manual – HMRC Internal Manual



Where income is derived from a foreign jurisdiction for a UK resident company and that income is taxed in that foreign jurisdiction, the UK may provide relief for foreign tax incurred by setting off the foreign tax on the British tax levied on this income. Where a credit is granted under TIOPA10/S18, an adjustment must be made to the amount included in tax interest to account for the foreign tax incurred.

This adjustment is calculated by dividing the amount of the TIOPA10/S18 credit by the appropriate corporation tax rate. This gives the notional amount of untaxed income which is then excluded from tax interest.

Additional guidance on double taxation relief is available at INTM160000+.


Anadux Ltd earns interest of £10 million in Country X with a withholding tax of £1 million (10%) levied on this by Country X’s tax agency during the financial year ending 31 March 2018. Anadux Ltd pays UK corporation tax at 19% which would normally mean a UK tax charge of £1.9m but the tax payable is reduced by a credit for foreign tax of £1 million under TIOPA10/S18.

Applying S388(3), the reduction in UK tax due to the credit for Country X tax, amount A, is £1 million. The corporation tax rate, before the credit, is 19% (B). The notional untaxed income is therefore £5,263,158 (£1,000,000 divided by 19%). Accordingly, the amount of tax interest income, after adjustment for S388, is £4,736,842 (£10,000,000 minus £5,263,158).

As a result, the CIR calculations reflect that £5,264,158 of income is effectively exempt from UK corporation tax due to double taxation relief for withholding tax.

In effect, this calculation involves dividing the tax interest income into two brackets. A portion (£4,736,842) is fully subject to corporation tax: no withholding tax is charged. The other slice (£5,264,158) is notional untaxed income. All of the withholding tax is allocated to this bracket, so the withholding tax should be equal to the amount of notional untaxed income multiplied by the applicable corporate tax rate, i.e. the full of 1 £000,000 of withholding tax incurred.

Interaction with tax-EBITDA

There is an interaction with the tax-EBITDA calculation that arises from the S388 adjustment. As a result, notional untaxed income under S388 is initially included in tax EBITDA under the basic definition (TIOPA10/S406-S407) before being excluded under an equivalent rule for the treatment of income tax. relief from double taxation (TIOPA10/S409). There is therefore no overall impact on the amount of EBITDA tax.

In particular, S407(1)(a) treats an amount of tax interest income as an excluded amount in the calculation of tax EBITDA. An amount which is treated as tax interest income after the application of S388 should be excluded from “adjusted corporation tax income”, by subtracting it from the amount taken into account by the corporation in determining its total taxable profits (see CFM95720). This amount will be the portion of tax interest income that is, in effect, treated by S388 as having been fully subject to corporation tax – see example above.

The amount treated by S388(2) as imputed untaxed income is not explicitly treated as an excluded amount under S407 in the calculation of tax EBITDA. Instead, its treatment is covered in S409.

The amount considered to be included in tax interest income is the amount fully taxable in the UK. Therefore, the notional untaxed income bears the entire foreign withholding tax. Therefore, all of the credit for foreign withholding tax is attributable to this notional untaxed income.

S409 requires calculation of theoretical untaxed income in the same way as S388 (see CFM95850). Since all of the withholding tax has been allocated to the amount treated as notional untaxed income by S388, this withholding tax should equal the notional untaxed income multiplied by the corporation tax rate , as shown in the example above. Therefore, all notional untaxed income resulting from the application of S388 should also be notional untaxed income when S409 is applied and also excluded from tax EBITDA.

Example (continued)

Continuing the example above, it is assumed that Anadux Ltd has no other taxable income for the period. As shown above, he has £4,736,842 of tax interest income for the period.

With regard to the calculation of tax EBITDA, £4,736,842 is an excluded amount in S407(1)(a), being tax interest income, but the notional untaxed amount of £5,263,158 does not is not so excluded. Accordingly, the £5,263,158 would fall for inclusion in tax EBITDA, but for the application of S409.

Since the £4,736,842 included in tax interest income is considered to have been fully subject to corporation tax, it follows that the entire overseas withholding tax is attributable to the £5,263,158 which has been excluded from tax interest income. Therefore, the £5,263,158 fulfills condition A of S406 – it is taken into account in determining the total taxable profits in CTA10/S4 and is not an excluded amount in S407.

As condition A of Section 406 is met for the £5,263,158, Section S409 must be taken into account. An adjustment is required for foreign tax, with notional untaxed income under S409 being calculated as follows:

  • Amount A is the amount of foreign tax attributable to the income, £1 million.
  • Amount B is the applicable CT rate, 19%.
  • The notional untaxed income under S409 is therefore £5,263,158 {#} – this is the amount excluded from tax interest income by S388.

It follows that in this example, of the gross interest of £10 million, £4,736,842 is included in tax interest income and the remaining £5,263,158 is notional income not taxed under S388 and S409. Consequently, the contribution of the £10 million to tax-EBITDA, after the transaction of S407 and S409, is nil. £4,736,842 is excluded by S407(1)(a) and £5,263,158 by S409.


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