INTM558060 - Hybrids: dual territory double deduction (Chapter 10): counteraction: dual resident company

The counteraction where a dual resident company is within the charge to UK corporation tax is set out at s259JB. A deduction that is subject to counteraction (and which is not reduced by an illegitimate overseas deduction) may only be set against dual inclusion income.

Where there is insufficient dual inclusion income in the period of the deduction, the excess amount of the dual territory double deduction denied may be carried forward and deducted only from dual inclusion income of the company in subsequent accounting periods.

It is important to note that the counteraction does not deny a deduction but restricts how it is used. So, reliefs that rely on the existence of a deduction may still be available despite the deduction being subject to a counteraction under Chapter 10. For example, Research and Development tax relief, which provides for additional relief for expenditure (that additional part of relief itself not being doubly deductible), are not prevented by the restricted use of a deduction under Chapter 10.

However, if it is reasonable to suppose there is an ‘Illegitimate overseas deduction’ (see below) then the deduction equal to that amount is denied entirely rather than restricted to use against dual inclusion income. In those circumstances any relief that relies on the existence of a deduction will not be available.

Illegitimate overseas deduction

The dual territory double deduction amount that may be set against dual inclusion income of the company must be reduced by the amount of any illegitimate overseas deduction.

An illegitimate overseas deduction is defined at s259JB(6) as all or part of the dual territory double deduction where it is reasonable to suppose that

  • the amount is in substance deducted
  • under the law of a territory outside the UK
  • from the income of any person (other than the company, with effect from 10 June 2021) for a taxable period, and
  • the income from which it is deducted is not dual inclusion income of the company

This may occur, for example, where the deduction creates a loss in the territory outside the UK which is subsequently surrendered via a group relief style mechanism to another company in that territory.

The illegitimate overseas deduction is treated as if it had already been deducted in a previous accounting period. This means that this part of the deduction is permanently denied, and it should not be included in the amount of any unused dual territory double deduction carried forward.

Dual inclusion income

Dual inclusion income of the company for an accounting period means an amount that is ordinary income of both

  • the company for that period for corporation tax purposes, and
  • the company for a permitted taxable period for the purposes of a tax charged under the law of a territory outside the UK

Ordinary income

Ordinary income means income that is brought into account when calculating taxable profits on which tax is charged. The full definition, including restrictions on what may be regarded as ordinary income and where specific reliefs may be treated as reducing the amount of ordinary income, is at s259BC and the concept is discussed further at INTM550560.

There are special recognition rules at s259BD covering instances of non-inclusion which treat an amount of income (where it has been subjected to another territory’s controlled foreign companies (CFC) charge) as if it had been included. This is discussed further at INTM550570.

Permitted taxable period

A taxable period of a hybrid entity is ‘permitted’ if the period

  • begins at any time before the end of 12 months after the end of the accounting period within which the amount is deducted by the investor, or
  • begins in a later period if a claim is made and it is just and reasonable that the ordinary income arises in that period instead of the earlier period