INTM164260 - UK residents with foreign income or gains: dividends: Dividends received by UK companies on or after 31 March 2001 - eligible unrelieved foreign tax - Case B

The legislation relating to EUFT was repealed for distributions paid on or after 1 July 2009.

Underlying and withholding tax

1 - The mixer cap

Company B in country B pays a dividend of 50 up to company A in country A. Company B has paid tax of 50 on its profits, and a further 5 withholding tax is paid when the dividend is paid to A. Company A then pays a dividend of 45 up to the UK. The rate of corporation tax at all stages is 30% and the upper rate for EUFT is 45%.

Use this link to view The mixer cap diagram

a - The dividend paid by A includes the dividend from B. The mixer cap (INTM164220) restricts credit for underlying tax at the level of B to: [(D + U) x M%] (50 + 50) x 30% = 30.

b - At the level of A, the mixer cap formula gives (45 + 55) x 30% = 30. So no further restriction is due.

2 - Eligible unrelieved foreign tax

c - The dividend is not one of those excluded under Section 806A(2) (see INTM164240) and EUFT can therefore arise on it.

d - If the mixer cap used 45% as M rather than 30%, the formula at level B would have produced (50 + 50) x 45% = 45 Therefore EUFT arising at this level is 45-30 = 15.

e - The formula is also reworked at level A, but tax and dividends relating to lower levels are excluded: ([45-50*] + [55-50] x 45% = 5 x 45% = 2.25. So an additional EUFT of 2.25 arises at this level. (*Note that a negative number is treated as a zero).

f - So the total EUFT arising on this dividend is 17.25.

Case B EUFT arising on a mixed dividend will be calculated by Business International, Underlying Tax Group at Nottingham. They will supply this to the Tax Specialist in response either to a submission under INTM164440 or a request for assistance from the group.