ERSM163130 - Interaction of UK law and treaties - from 6 April 2015: treaty time apportionment and chapter 5B

The rules of Chapter 5B of Part 2 of ITEPA 2003 apply to employees who meet the international mobility conditions. (ERSM162400) Their broad effect is to restrict the amount of income from employment-related securities on which UK income tax is charged on the arising basis to that part of the income that is related to

• duties in the UK for those not UK-resident and for those resident but not domiciled in the UK who meet the requirements of ITEPA03/S26A (ERSM162615), or
• all duties except those for foreign employers that are carried out entirely outside the UK for those resident in the UK but not domiciled here who do not meet the requirements of ITEPA03/S26A.

Frequently, employees who are eligible to make a claim under a double taxation treaty will also be those to whom Chapter 5B of Part 2 of ITEPA 2003 applies.

It may be the case that the effect of Chapter 5B will remove the need to make a claim under a treaty, either for time apportionment, or for foreign tax credit relief. Alternatively, a time apportionment claim may make the application of the Chapter 5B rules academic. Sometimes, however, the interaction of Chapter 5B and tax treaties will be more complex.

Where UK is territory of residence when chargeable event occurs

From 6 April 2015 Chapter 5B of Part 2 of ITEPA taxes “chargeable foreign securities income” (see ERSM162610) only to the extent that it is remitted to the UK. In many cases, the new rules of Chapter 5B will mean that the individual will not suffer tax on the same income in the UK and a treaty partner State. See example 3 at ERSM163160.

However, mismatches may occur, especially where the treaty with another State apportions the gain on an alternative basis to the domestic approach. One example of this is the UK/US Double Taxation Treaty. The US taxes the US workday proportion of a share option gain based on the workdays between grant and exercise, while Chapter 5B (which reflects OECD guidelines in this area) taxes the proportion of the gain based on UK duties between grant (referred to in the legislation as the “acquisition” of the option) and vesting (see ERSM162565)

Where income is doubly taxed as a result, Foreign Tax Credit Relief is available in respect of foreign tax suffered on any part of the gain that has been taxed in the UK. If all or part of an amount of employment income arising from employment-related securities or employment-related securities options is chargeable foreign securities income, then, if that part is not remitted (see ERSM162900 for the meaning of remittance), it will not be subject to UK tax as employment income. In these circumstances, foreign tax paid on an amount of chargeable foreign securities income that has not been remitted to (and therefore not been taxed in) the UK will not be available for credit against the UK tax charged on the “UK portion” of the income.

See examples at ERSM163140 et seq.

Where UK is not territory of residence when chargeable event occurs

As has been mentioned at ERSM163110, if the UK is not the country of residence when a chargeable event happens, then the employee may be resident in a territory with which we have a double taxation treaty. If so, they will be able to make a claim that the UK restricts its liability to the amount derived from employment in the UK by means of time apportionment. In many cases, the rules of Chapter 5B will mean that time apportionment under a treaty claim is not required because the UK’s domestic taxing rules achieve the same end. However, the effect of Chapter 5B apportionment is to make “chargeable foreign securities income” assessable in the UK on the remittance basis, whereas treaty time apportionment exempts a proportion of specific employment income from a UK tax charge. Where this is the case, the relief available under the Treaty will take precedence over the rules of Chapter 5B. In addition, mismatches can occur between the apportionment required by the Chapter 5B rules and that offered by a particular treaty and, again, where the relief available under the treaty exceeds that available via Chapter 5B, the treaty will take precedence.

UK Capital Gains Tax charge on unchargeable foreign securities income

As described in ERSM163020, TCGA92/S119B has the effect of reducing the amounts which are treated by TCGA92/S119A as forming part of the acquisition cost of the employment-related securities where there is a disposal of them for CGT purposes. As a result it may be that amounts are taxed as capital gains which are unchargeable foreign securities income and have been subject to tax in an overseas territory. If this is the case, then a claim for Foreign Tax Credit Relief may be required.