Double tax relief avoidance schemes blocked
The Government has announced that it is blocking three structured tax avoidance schemes that were intended to exploit the double tax relief (DTR) rules.
Unauthorised Unit Trusts – These were being used to avoid restrictions on double tax relief and to generate ‘repayments’ of tax that the UK Exchequer has not received. To counter this, legislation will be introduced with immediate effect. In future, to the extent any distribution treated as paid by an unauthorised unit trust is paid out of overseas income on which UK tax has been reduced by DTR, the distribution will be treated by the recipient as overseas income under deduction of overseas tax.
Manufactured Overseas Dividends (MODs)– Some companies have been using manufactured overseas dividends instead of real overseas dividends in order to disapply the anti-avoidance rules in the DTR legislation. To counter this, legislation will be introduced with immediate effect to amend the relevant DTR anti-avoidance provision. In future it will apply to deemed overseas tax deducted from MODs in the same way that it applies to real overseas dividends. The amendment will ensure that the provision can also apply in other similar circumstances to prevent credits for notional overseas tax from being treated more favourably than tax credits on real dividends.
Manufactured Interest – Certain UK manufactured interest payments have been used to avoid tax under the rules relating to Controlled Foreign Companies (CFCs) by artificial generation of DTR. To counter this, regulations, taking immediate effect, repeal the rules that deem companies to have received UK manufactured interest under deduction of tax. Instead, the recipient will simply be taxed on the amount of manufactured interest it receives with no relief for any notional tax credit. Further related regulations have alos been introduced to ensure that the MOD rules cannot be used to claim relief for overseas tax in inappropriate circumstances.