INTM602540 - Transfer of assets abroad: Other general provisions: Double taxation relief

The person abroad may be subject to tax in their own country of residence on the income they received that forms the basis of the deemed income taxed on the UK resident individual under the income charges (INTM600360).

It is possible for an individual to be resident in two countries at the same time and to be taxable in both.

There are three main methods whereby relief is given under international agreements and by domestic legislation:

• complete exemption from tax in the country of origin and (in certain circumstances) in the country of residence.
• partial relief from tax in the country of origin by reference to a maximum rate chargeable in that country.
• a credit allowance in respect of tax paid in the country of origin, and given by the country of residence, usually in the form of a credit against its own tax. This method is used for income which remains doubly taxed, including cases within the second bullet above.

All three appear in Double Taxation Agreements negotiated by the UK. Where relief is not given under an agreement, the Taxes Acts provide that relief by the credit method is to be given unilaterally to UK residents.

Relief by way of credit can be given under ITA07/S746(2) in respect of foreign tax similar in nature to UK income tax or corporation tax charged directly on the company/trust on income arising from a source in the territory in which the company/trust is resident. No credit relief should be given for tax which is similar to capital gains tax, nor in respect of any tax directly charged on the company/trust on income received and subject to tax in a territory in which the company/trust is not resident.

However, where an overseas company or a withholding agent is required to deduct tax from dividends and pay this over to the appropriate authority, this withholding tax can be credited to the recipient overseas company/trust, which is the person abroad in respect of the income charge. This applies even if the rate of tax is higher than that which would have been charged had the dividend been paid to an individual in the UK. This does not apply to tax deducted by a paying agent in the country in which the person abroad company/trust is not resident.

Some Double Taxation Agreements contain a provision that the industrial or commercial enterprise resident in that jurisdiction shall not be subject to UK tax, unless the enterprise is engaged in a trade or business in the UK through a permanent establishment situated there. Contentions have been made by some taxpayers, that such a provision prevents a charge under ITA07/S720 on the income of an enterprise resident in a jurisdiction with such an article in their double taxation agreement.

HMRC does not agree with this view and in the case of CIR v Willoughby (70 TC 57), where this point was considered in the context of the transfer of assets abroad provisions, the Special Commissioners found “that the income of Royal Life deemed to be Professor Willoughby’s income does not come within the provisions in Article 3(2). It is not exempt from UK tax by virtue of the arrangements”.

This was an area of dispute following the decision in the case of Bricom Holdings Ltd v Inland Revenue Commissioners [1997] STC 1179. In order to put the position beyond doubt, the Finance Act 2013 makes it clear that the income taxable on an individual under the income charge is an amount of income equal to the amount of income arising to the person abroad, but it is not the actual income of the person abroad. This amendment is effective from 6 April 2013.

The issue was also considered in Davies, McAteer & Evans-Jones v HMRC [2020] UKUT 0067 (TCC), wherein the appellants contended that they were not chargeable under the transfer of assets provisions in relation to the income of an offshore company (“ABP”) by reason of Article 7 of the Double Tax Agreement between the UK and Mauritius. The Upper Tribunal concluded at paragraph [78] of their judgement that the

transfer of assets abroad provisions deem the profits of ABP to be the income of the Appellants and then charge the deemed income of the Appellants to tax. However, those provisions charge the income to tax as income of a miscellaneous character and not as trading profits arising to the Appellants. The Appellants are not relieved against that tax under Article 7 of the Treaty because the UK is not taxing the profits of ABP but is taxing something different, namely, the deemed income of the Appellants. It is nothing to the point that the deemed income of the Appellants is computed by reference to the profits of ABP. It remains the case that the deemed income of the Appellants is not the profits of ABP; and it remains the case that the trading profits of ABP are taxed by Mauritius and not by the UK. The Mauritian tax authorities would have no more cause to complain that the Treaty is not being respected in this case than they would have if the profits of ABP were distributed to UK residents and taxed in their hands. In either case, the UK would be simply seeking to tax its own residents. Applying Bricom in this way, we give effect to the policy of the Treaty as described earlier and the Treaty is not used, impermissibly, to obtain double relief or to avoid tax.

Full instructions in respect of Double Taxation Relief can be found in the Double Taxation Relief manual, and the International manual from page INTM160000 onwards.