CFM95850 – Corporate Finance Manual – HMRC Internal Manual



Where the income is not or is only partially subject to UK tax due to relief from double taxation, the amount on which corporation tax has not been payable is excluded from the calculation taxable EBITDA.

Where income arises in a foreign jurisdiction for a resident of the United Kingdom and such income is taxable in the foreign jurisdiction, the United Kingdom may grant its resident double taxation relief for foreign tax by setting off the foreign tax on UK tax levied on income. This may be granted under the terms of a double taxation agreement between the UK and the foreign country in question, or it may be granted unilaterally under UK tax provisions.

The amount of foreign tax which can be deducted from UK corporation tax is generally capped at the amount of UK corporation tax which would arise from profits chargeable in the foreign country.

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

Effect for tax purposes on EBITDA

The inclusion of income which, due to receipt of double tax relief, is in fact not subject to UK tax, or only partly, would inflate tax EBITDA above the amount of income that is actually subject to corporation tax.

Therefore, TIOPA10/S409 has the effect of reducing tax–EBITDA by the amount of overseas tax actually credited to the UK, divided by the rate of corporation tax applicable to that income. This sum gives the implicit amount of profits on which corporation tax has not been due.


If £100,000 is the foreign tax incurred on income of £1 million, the amount of profits on which corporation tax would, in effect, be levied has been reduced by £100,000 divided by 19% (c i.e. reversing the normal calculation to arrive at the profits that would correspond to that amount of corporation tax).

The reduction based on £100,000 represents corporation tax of 19% on profits of £526,316. This has the effect of grossing up the amount of foreign tax to give a figure for the amount of profit that is covered by foreign tax and therefore not actually taxed in the UK.

Normal calculation (before business interest restriction):

Gross revenue 1,000,000
Foreign tax ten% 100,000
Gross revenue 1,000,000
Corporation tax (before DTR) 19% 190,000
Double tax relief (100,000)
Debt net of corporation tax 90,000

Calculation of tax EBITDA under the corporate interest restriction:

Taxable profits 1,000,000
Reduced by the profits actually sheltered by DTR 100,000 divided by 0.19 (526,316)
Remaining quantity 473,684

So only the £473,684 would be included in tax EBITDA, not the full £1m.

It does not matter what type of income the foreign tax relates to, as long as it is a type included in Tax-EBITDA, since this calculation works solely by reference to the amount of credit relief given.

Interaction with TIOPA10/S388

Where an amount which would otherwise be tax interest income is treated as “notional untaxed income” by S388, Ss388, 406, 407 and 409 interact such that the amount will also be “notional untaxed income” in under S409 and therefore not included in the tax-EBITDA.

For details and an example, see CFM95680.


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