Finance (No.2) Act 1987

68 Double taxation relief: underlying tax reflecting interest on loans.

(1) Section 66 of the [1982 c. 39.] Finance Act 1982 (restriction of double taxation relief in respect of underlying tax on certain dividends) shall be amended in accordance with this section.

(2) After subsection (1) there shall be inserted the following subsections—

“(1A) In a case where this section applies, the amount of the credit for that part of the foreign tax which consists of the tax referred to in subsection (1)(c) above shall not exceed an amount determined under subsection (1B) below.

(1B) The amount referred to in subsection (1A) above is a sum equal to corporation tax, at the rate in force at the time the foreign tax referred to in paragraph (c) of subsection (1) above was chargeable, on so much of the interest on the loan as exceeds the amount of the lender’s relevant expenditure which is properly attributable to the period for which that interest is paid.

(1C) In subsection (1B) above—

(a) “interest”, subject to subsection (1D) below, has the meaning assigned to it by section 65(1A) above; and

(b) “the lender’s relevant expenditure” means the amount which, if the company referred to in subsection (1)(d) above were resident in the United Kingdom (and liable to tax accordingly) would be its financial expenditure in relation to the loan, as determined in accordance with subsections (5) to (5E) of section 65 above.

(1D) If, in accordance with subsection (2) or subsection (4) below, the amount of the dividend would be treated for the purposes of corporation tax as increased or reduced by any amount, then the amount which, apart from this subsection, would be the amount of the interest referred to in subsection (1B) above shall be taken to be increased or reduced by the same amount as the dividend is so treated as increased or reduced.”

(3) Where the loan referred to in paragraph (c) of subsection (1) of section 66 of the Finance Act 1982 was made pursuant to an agreement entered into before 1st April 1987, this section does not apply in relation to tax payable as mentioned in that paragraph by reference to interest payable before 1st April 1989 but, subject thereto, this section applies in relation to tax so payable by reference to interest payable on or after 1st April 1987.