Taxation (International and Other Provisions) Act 2010 section 17

Rule 9: credit in relation to dividends for spared tax

Section 17 deals with how unilateral credit relief applies to "spared tax" — that is, foreign tax that would have been payable but for a development-related tax relief — when dividends flow through an intermediate holding company before reaching a UK company.

• Where a foreign company (Company A) benefits from a tax relief in its territory, pays a dividend to a fellow resident company (Company B), and Company B in turn pays a dividend to a UK company (Company C), the tax that Company A would have paid but for the relief ("spared tax") can be treated as if it had actually been paid for the purposes of computing credit relief on Company C's dividend
• This treatment only applies where, had Company B itself been UK resident, it would have been entitled under a double taxation agreement with that territory to treat the spared tax as payable — effectively extending the benefit of tax sparing provisions through an intermediate holding company
• Apart from this specific scenario, no credit relief is available for tax that was not actually paid because of a foreign relief — this restriction applies regardless of whether any double taxation arrangements exist that contain tax sparing provisions designed to encourage industrial, commercial, scientific, educational or other development
• All references in the credit relief rules to tax being "payable", "chargeable" or "not chargeable" must be read consistently with the treatment of spared tax as if it had been paid