Tax Relief can be applied in the UK where an individual or company is required to pay tax on the same income in another country.
How is UK tax relief achieved?
In the UK, this can be achieved in two ways:
- Relief under Double Taxation Agreements – this is where the Double Tax Treaty between the two relevant countries ensures that foreign tax credit relief can be applied – see our blog on Double Tax Treaties here.
- Unilateral relief – this may be available against UK tax to a person resident in the UK for overseas tax charged on income arising in that country, if relief is not available under an agreement.
The relief may be due where either there is no agreement with the country concerned, or the income arises in a country with which there is an agreement, but the agreement does not cover the category of income or overseas tax involved.
What UK tax relief is given?
The basic rule is that the relief available is the lower of the UK corporation tax due on that source of income and the overseas tax suffered.
An individual or company may also elect not to take relief by credit for overseas tax paid.
If relief by credit (either under an agreement or unilaterally) is otherwise unavailable, or such an election is made, they would be entitled to a deduction from the overseas income of any such overseas tax paid.
Relief by deduction can be more advantageous than credit relief where the UK tax liability on the overseas income is less than the overseas tax suffered available for double tax relief. This is because foreign tax credit relief can only reduce a UK tax liability to zero, whereas a deduction can create a loss which can be used to offset profits in future periods.
Recent changes to UK:Israel Double Tax Treaty
In the recent new protocol to the UK:Israel Double Tax Treaty, there was a small change in that although both countries will generally continue to apply the credit method for the elimination of double taxation:
- The UK will exempt dividends paid to a company resident in the UK if the conditions for an exemption under UK law are met and will exempt profits of a permanent establishment of a UK company if the conditions for an exemption under UK law are met; and
- If the conditions for exemption for dividends are not met, The UK will allow a credit, including for the tax paid on the profits out of which the dividend was paid, provided that the UK resident directly or indirectly controls at least 10% of the paying company’s voting power;
This is a complex area and needs to be looked at on a case by case basis, so if you have any queries please do not hesitate to get in touch with us.
