LAM09250 - Double Tax Relief: Companies with overseas branches

A company can claim credit for foreign tax payable on profits, income or chargeable gains from sources within another state against any UK tax computed by reference to the same profits, income or chargeable gains.

Where foreign tax has been charged on profits of long-term business carried on in an overseas territory through a permanent establishment (PE) there, the rules explained in INTM163030 to INTM163050 will apply, subject to TIOPA10/S96.

Profits of the PE and attribution of capital

INTM163030 requires calculation of profits attributable to each PE in order to determine the amount of CT applicable to the PE, and so set the limit for double taxation relief. Where a life insurance company carries on business through two or more PEs it may be difficult to establish with accuracy the profit of any particular PE. Allocation of premiums, claims, expenses and liabilities to a particular PE should not be problematic.

Attribution of the investment return may be more difficult. As outlined in INTM288030, an insurance company will hold assets to back insurance liabilities (technical provisions) and to meet capital requirements to support the risks insured. The attribution of the investment return on assets supporting the insurance business of a PE is an important component in calculating the profit attributable to a PE of an insurance company. The attribution of profits to insurance PEs is discussed in more detail in the General Insurance Manual at GIM10210.

Non-BLAGAB computations – restriction of credit relief

TIOPA10/S96 restricts the credit relief due in a non-BLAGAB trade profit computation to ensure that credit relief is only given for tax which will not be borne by policyholders i.e. is tax on shareholders’ profits. The investment return on non-BLAGAB reserved as a policyholder liability does not generate a net UK taxable profit liability and accordingly the tax credit against the trade profit calculation is restricted to reflect this.

The provision works by restricting on a country by country basis the amount of the foreign tax which qualifies for relief. Credit relief for the tax imposed by the overseas territory concerned must not exceed the greater of:

  • tax which is charged by reference to local profits (TIOPA10/S96(4)(a))
    This means a charge on profits which allows a deduction for policyholder liabilities similarly to a UK trade profit calculation. This limit will therefore only bite where there are two (or more) separate foreign tax charges, one of which is on trading basis lines and one of which is not.
  • the shareholders’ share of the total tax (TIOPA10/S96(4)(b)).That share is a fraction of the foreign tax A/B (TIOPA10/S96(5))

where:

  • A is the relevant UK-taxable profits before giving relief for any foreign tax deducted from income under TIOPA10/S96(7)
  • B is a figure which gives a measure of the company’s total investment return from the category of business. That figure is the excess of its receipts, excluding premiums and recoveries under reinsurance contracts, over its expenses

If there is no excess in B, or if the profits in B are greater than any excess, the whole of the foreign tax is the shareholders’ share. If there are no profits, none of the foreign tax is the shareholders’ share (TIOPA10/S96(6)).

If credit relief is restricted by TIOPA10/S96 then

the restricted element is not available for carry forward or carry back as credit relief for unrelieved foreign tax under TIOPA10/S73(1) as TIOPA10/S96(7) specifies that the restricted element may only be relieved by deduction.

In these circumstances TIOPA10/S31(2)(a) does not prevent relief both by way of credit and, for the foreign tax restricted, by way of deduction from income (TIOPA10/S96(7)(2)(a)).