Double taxation relief 4 / 4

DTR

What is DTR?

Under UK tax law a company that is resident in the UK must pay UK C.T. on it's worldwide income.

In the case of income arising in another country, that income may also be taxed in the foreign country, and will be taxed in the UK, if the company is UK resident.

The rules that apply to the taxing of overseas income are set out in the Organisation for Economic Co-operation and Development Model (OECD).

This model states that if there is no double taxation treaty between 2 countries, then double taxation relief is available. (There will never be a treaty in your exam, you will always have to calculate DTR)

Therefore, in order to avoid being taxed on the same income two times, double taxation relief (DTR) is available, usually as a tax credit against the UK C.T. liability.

  1. UK tax on overseas source

  2. Overseas tax suffered.

Illustration

A Ltd. is UK resident.

It has one wholly owned subsidiary B. Inc. 

B. Inc. was incorporated in Barbados and trades from a permanent establishment in Barbados. 

B. Inc. has not made an election to exempt its profits from UK C.T.

It's trading profits for FY24 are £300,000 and the C.T. rate in Barbados is 18%.

How much D.T.R will be available?

  • Solution

    DTR is the lower of:

    1) UK tax suffered (£300,000 *25%) = £75,000
    2) Foreign tax suffered (£300,000 *18%) = £54,000

    Therefore, DTR will be £54,000