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LK 6: Use of credits by group companies
or “How group companies can share foreign tax credits”
You could also call this:

“Rules for tax credits on distributions from foreign companies you partly own”

This law is about tax credits for a type of company called a Controlled Foreign Company (CFC) when it gets a taxable distribution. You need to know about this if you own 10% or more of a CFC.

If your CFC gets a taxable distribution, you might not get a tax credit for it. You’ll only get a credit if the tax paid is very similar to non-resident withholding tax (NRWT).

The amount of tax credit you can get is limited. It’s worked out using a formula that looks at how much of the distribution you got compared to the total distribution, and how much foreign tax was paid.

To figure out your actual tax credit, there’s another formula. This one uses your income interest in the CFC and the amount of tax worked out in the first formula.

The law also explains what all the terms in these formulas mean, like ‘person’s taxable distribution’ and ‘total distribution’.

Remember, this is just a simple explanation. If you need to use this law, you should talk to a tax expert who can help you understand how it applies to your situation.

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Next up: LK 8: Tax credits of consolidated companies

or “Tax credits are shared among companies in a consolidated group”
Next

Part L Tax credits and other credits
Tax credits relating to attributed controlled foreign company income

LK 7Taxable distributions and NRWT rules

  1. This section applies when a CFC receives a taxable distribution in an accounting period and, for a person with an income interest of 10% or more in the CFC under the rules in sections EX 14 to EX 17 (which relate to the 10% threshold and variations in income interest level), the taxable distribution gives rise to attributed CFC income to which section EX 19 (Taxable distribution from non-complying trust) applies.

  2. The person does not have a tax credit in relation to tax paid on the taxable distribution unless the tax is substantially the same as non-resident withholding tax (NRWT).

  3. The amount of tax that gives rise to the credit must not be more than an amount calculated using the formula—

    (person's taxable distribution ÷ total distribution) × foreign tax paid.

    Where:

    • In the formula in subsection (3),—

    • person’s taxable distribution is the amount of the taxable distribution derived by the CFC, including a payment of tax that meets the requirements of subsection (2):
      1. total distribution is the total amount of the distribution derived by the CFC, including a payment of tax that meets the requirements of subsection (2):
        1. foreign tax paid is the payment of tax that meets the requirements of subsection (2).

          1. The amount of a credit of a person under this section is equal to an amount calculated using the formula—

            section EX 18 income interest × amount of tax.

            Where:

            • In the formula in subsection (5),—

            • section EX 18 income interest is the income interest of the person used to calculate attributed CFC income under section EX 18 (Formula for calculating attributed CFC income or loss) for the accounting period corresponding to the tax year:
              1. amount of tax is the amount of tax determined under subsection (3).

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                Notes
                • Section LK 7 list of defined terms non-resident withholding tax: repealed, on , by section 243 of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).