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The following examples illustrate the relief described in INTM256230 to INTM256310. (The rates of tax used in the examples have been set in order to help illustrate various aspects of the legislation, rather than always being actual rates.)

Example 1

A Ltd is a United Kingdom company with a wholly owned subsidiary X which is a controlled foreign company. A Ltd is subject to an apportionment under Chapter IV for the year ended 31 March, in respect of chargeable profits of X totalling 拢100,000 with no creditable tax. The liability is

-	拢
Chargeable profits	100,000
Tax @ 45 % in respect of chargeable profits	45,000
Less creditable tax	NIL
Tax charged	45,000

On the following 1 June, A Ltd receives a dividend of 拢45,000 from X paid out of the latter鈥檚 relevant profits of 拢120,000 for the period for which A Ltd was assessed as above.

The liability of A Ltd on the dividend is

-	拢
Dividend received	45,000
Corporation tax @ 30 %	13,500
Less Chapter IV tax treated as underlying tax (see below)	13,500
Net payable	NIL

The Chapter IV tax which qualifies for credit is:-

拢45,000 脳 拢45,000/120,000 = 拢16,875

computed in accordance with ICTA88\S799 (1) and (2). The relief is, however, limited to the Corporation Tax chargeable on the dividend that is, 拢13,500 in accordance with ICTA88\S797 and excess Chapter IV tax of 拢3,375 cannot be relieved in any way.

Example 2

The facts are as in Example 1 except that X has creditable tax of 拢10,000 so that its profits available for distribution are 拢110,000. The liability of A Ltd under Chapter IV is

-	拢
Chargeable profits	100,000
Tax @ 45 %	45,000
Less creditable tax	10,000
Tax Charged	35,000

The liability on the subsequent dividend is

-	-	拢
Dividend received	-	45,000
Grossing for foreign tax 10,000 脳 45,000/110,000	-	4,091
Amount chargeable	-	49,091
Corporation tax @ 30%	-	14,727
Double taxation relief	4,091	-
Chapter IV tax treated as underlying tax	10,636	14,727
Net payable	-	NIL

The Chapter IV tax which qualifies for relief is

拢35,000 脳 45,000/110,000 = 拢14,318

However, the total double taxation relief available to A Ltd is limited under ICTA88/S797 to the Corporation Tax charged on the dividend.

Example 3

The facts are as in Example 1 except that 13 months later on 1 May, A Ltd sells 25% of its shareholding in X to another United Kingdom company. It makes no claim under ICTA88/SCH26/PARA3. The liability of A Ltd in respect of the dividend is

-	拢
Dividend received 拢45,000 x 75/100	33,750
Corporation tax @ 30%	10,125
Less Chapter IV tax	10,125
Net payable	NIL

The Chapter IV tax which qualifies for relief is

拢45,000 脳 75/100 脳 45,000/110,000 = 拢13,806.82

but the limit on credit rule applies as in the earlier examples.

The liability in respect of the dividend on the purchaser of the shares in X is

-	拢
Dividend received 拢45,000 x 25/100	11,250
Corporation tax @ 30%	3,375
Less Chapter IV tax	3,375
Net payable	NIL

The purchaser is entitled to credit for Chapter IV tax paid by A Ltd (see INTM256250). The tax available to the purchaser for relief is

拢45,000 脳 25/100 x 45,000/110,000 = 4,602.28

but the limit on credit rule again applies.

Example 4

P Ltd, a United Kingdom company has a wholly-owned, non-resident subsidiary Q. Q has a wholly owned subsidiary R which is a controlled foreign company. R has chargeable profits of 拢200,000 and creditable tax of 拢10,000 in respect of which P Ltd is assessed under Chapter IV for the year ended 31 March Year 1. The Chapter IV liability is

-	拢
Chargeable Profits	200,000
Tax @ 35 %	70,000
Less creditable tax	10,000
Net payable	60,000

In the year ended 31 March Year 3, R pays a dividend of 拢150,000 to Q out of its relevant profits for the year ended 31 March Year 1 of 拢300,000, namely, half of the profits available for distribution. Q is charged tax of 拢10,000 on the dividend and pays the balance of the dividend, that is, 拢140,000 to P Ltd as a dividend. To compute the liability of P Ltd in respect of the dividend the following steps are required:

1. The tax paid by Q in respect of its profits (that is, 拢10,000) is treated as underlying tax in accordance with ICTA88/S801(1)(b).
2. The tax paid by R in respect of that part of its profits now paid to Q as a dividend (that is, 拢10,000 脳 陆 = 拢5,000) is treated as tax paid by Q in accordance with ICTA88/S801(2).
3. The tax paid by P Ltd under Chapter IV is treated as underlying tax.
4. The dividend received by P Ltd is increased by the amounts in (a) and (b) above but not by the Chapter IV Tax in (c).

Assuming a corporation Tax rate of 30% the liability of P Ltd in respect of the dividend is

-	-	-	拢
Dividend received	-	-	140,000
Add tax paid by Q	-	-	10,000
tax paid by R	-	-	5,000
Amount assessable	-	-	155,000
Corporation Tax @ 30%	-	-	46,500
Less double taxation relief	-	-	-
tax paid by Q	-	10,000	-
tax paid by R	-	5,000	-
Chapter IV tax	60,000 脳 陆	30,000	45,000
net payable	-	-	1,500

Example 5

The facts are as in Example 1 except that on payment of the dividend of 拢45,000 to A Ltd X deducts tax at the rate of 20% so that the net amount received by A Ltd is 拢36,000. Its liability is

-	-	拢
Dividend received	-	36,000
Foreign withholding tax	-	9,000
Amount assessable	-	45,000
Corporation Tax @ 30%	-	13,500
Chapter IV tax (see example 1)	16,875	-
Foreign withholding tax	9,000	-
Double taxation relief available	25,875	-
restricted to	-	13,500
-	-	NIL

The excess of double taxation relief over the Corporation Tax payable on the dividend up to the amount of the withholding tax (that is, 拢9,000) is 鈥渨asted relief鈥� in accordance with paragraph INTM256290. If A Ltd so claims, its Chapter IV liability for the year ended 31 March is reduced by that amount and 拢9,000 is repaid, as appropriate.

Example 6

Controlled foreign company Z has chargeable profits of 拢110,000 and creditable tax of 拢10,000 for the year ended 31 March Year 1. The chargeable profits are apportioned 拢66,000 to a United Kingdom company G Ltd, which self assesses under Chapter IV for its own accounting period to 31 March Year 1 and 拢44,000 to non-residents.

The tax in respect of the chargeable profits apportioned to G Ltd is

-	拢
Tax on chargeable profits (拢66,000 @ 30%)	19,800
Less Apportioned creditable tax (60% of 拢10,000)	6,000
Tax assessed	13,800

In the year to 31 March Year 2, the controlled foreign company pays a dividend 拢60,000 for the year to 31 March Year 2, representing one half of the relevant profits of 拢120,000, and 拢36,000 (60% of 拢60,000) is paid to G Ltd. The tax liability on the dividend is

-	拢
Dividend	36,000
Add Foreign tax (60% of 陆 脳拢10,000)	3,000
Income	39,000
Corporation Tax at 30%	11,700
Less Underlying relief for foreign tax	3,000
-	8,700
Less Relief for Chapter IV tax 陆 脳 13,800	6,900
Tax chargeable	1,800

Since part of the chargeable profits of Z were apportioned to persons other than United Kingdom companies and the dividend was not paid out of specified profits, the rules at INTM256300 apply. The dividend paid to G Ltd is regarded as paid primarily out of the 鈥榯axed profits鈥� of Z so that the Chapter IV tax charged on G Ltd is attributed to the dividend which is received and not to the dividends paid by Z to non-residents.