Finance Bill

House of Commons

Session 2007 - 08
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 12 — Tax credit for certain foreign distributions
Part 1 — The tax credit
214

3
In the heading to section 397, after “distributions” insert “of UK resident
companies”.
4
After section 397 insert—
“397A
  Tax credits for distributions of non-UK resident companies: UK
residents and eligible non-UK residents
5
(1)
This section applies where a UK resident or eligible non-UK
resident—
(a)
receives a relevant distribution made by a non-UK resident
company, and
(b)
is a minority shareholder in the company at the time the
10
distribution is received.
(2)
The person is entitled to a tax credit equal to one-ninth of the amount
or value of the grossed up distribution (but see subsections (3) and
(6)).
(3)
Subsection (2) only applies so far as the distribution is brought into
15
charge to tax, and accordingly if the person’s total income is reduced
by any deductions which fall to be made from the distribution, the
tax credit for the distribution is reduced in the same proportion as
the distribution.
(4)
The person may claim to deduct the tax credit from the income tax
20
charged on the person’s total income for the tax year in which the
distribution (or the part of the distribution to which the tax credit
relates) is brought into charge to tax.
(5)
If a distribution is, or is treated under any provision of the Tax Acts
as, the income of a person (“P”) other than the recipient (“R”), P (not
25
R) is treated as receiving it for the purposes of this section (and so P
(not R) is entitled to a tax credit if P falls within subsection (1)).
(6)
This section is subject to the following provisions—
section 171(2B) of FA 1993 (no tax credit for distributions in
respect of assets in Lloyd’s member’s premium trust fund),
30
section 504(4) of ITA 2007 (disapplication of certain provisions
for income of unauthorised unit trusts),
section 592 of ITA 2007 (no tax credits for borrower under stock
lending arrangement),
section 593 of ITA 2007 (no tax credits for interim holder under
35
repo), and
section 594 of ITA 2007 (no tax credits for original owner under
repo).
(7)
In this section—
“eligible non-UK resident”, in relation to a distribution, means
40
an individual who, at any time in the tax year in which the
distribution (or the part of the distribution to which the tax
credit relates) is brought into charge to tax, is a non-UK
resident who meets the condition in section 56(3) of ITA 2007
(residence etc of claimants),
45
“grossed up distribution” means the distribution increased by
the amount of any tax chargeable in respect of the
distribution directly or by deduction under the laws of the

Finance Bill
Schedule 12 — Tax credit for certain foreign distributions
Part 1 — The tax credit
215

territory in which the company is resident, including special
withholding tax,
“minority shareholder”, in relation to a company, has the
meaning given in section 397C,
“relevant distribution”, in relation to a person, means—
5
(a)
a qualifying distribution arising in a relevant tax year,
(b)
a cash dividend paid over to the person under
paragraph 68(4) of Schedule 2 of ITEPA 2003 (cash
dividend paid over if not reinvested etc) in a relevant
tax year, and
10
(c)
a dividend treated under section 407 as paid to the
person in a relevant tax year,
“relevant tax year” means the tax year 2008-09 or a subsequent
tax year, and
“special withholding tax” has the meaning given in section
15
107(3) of FA 2004.
(8)
Section 397B makes provision about the application of this section in
the case of overseas dividends arising from manufactured overseas
dividends (within the meaning of Chapter 2 of Part 11 of ITA 2007).
397B
Tax credits under section 397A: manufactured overseas dividends
20
(1)
This section applies where, under section 581 of ITA 2007, a person
is treated as receiving an overseas dividend by virtue of having
received a manufactured overseas dividend which is representative
of an overseas dividend.
(2)
For the purposes of section 397A, the person is treated as receiving a
25
relevant distribution made by a non-UK resident company if, and
only if, the manufactured overseas dividend is representative of such
a distribution.
(3)
References in section 397A to the grossed up distribution have effect
as if they were references to the gross amount of the overseas
30
dividend of which the manufactured overseas dividend is
representative, disregarding the amount of any overseas tax credit.
(4)
In this section—
“gross amount”, in relation to a manufactured overseas
dividend, has the same meaning as in Chapter 2 of Part 11 of
35
ITA 2007 (manufactured payments) (see section 589 of that
Act),
“manufactured overseas dividend” and “overseas tax credit”
have the same meaning as in Chapter 2 of that Part (see
sections 581 and 591 of that Act), and
40
“overseas dividend” has the same meaning as in that Part (see
sections 567 of that Act).
397C
Meaning of “minority shareholder”
(1)
In section 397A “minority shareholder”, in relation to a non-UK
resident company, means a person whose shareholding in the
45
company is less than 10% of the company’s issued share capital.

Finance Bill
Schedule 12 — Tax credit for certain foreign distributions
Part 2 — Consequential provision
216

(2)
Subsections (3) to (6) make provision about the circumstances in
which shares form part of a person’s shareholding in a company for
the purposes of this section.
(3)
Shares form part of a person’s shareholding in a company to the
extent that the person is beneficially entitled to the shares or to a
5
distribution arising in respect of the shares (or both).
(4)
Shares form part of a person’s shareholding in the company where—
(a)
a person is a settlor in relation to a settlement, and
(b)
income arising from shares comprised in the settlement is
treated for income tax purposes as the income of that person
10
and of that person alone.
(5)
Shares form part of the shareholding in a company of a person (“P”)
if—
(a)
they form part of the shareholding in the company of a
person connected with P,
15
(b)
P transferred the shares to the connected person or arranged
for the connected person to acquire the shares, and
(c)
the purpose of the transfer or arrangement was wholly or
mainly to enable P to avoid tax.
(6)
Shares form part of a person’s shareholding in a company if that
20
person has transferred the shares to another person under a repo or
stock lending arrangement.
(7)
In this section—
“repo” has the same meaning as in Part 11 of ITA 2007 (see
section 569 of that Act),
25
“settlement” and “settlor” have the same meaning as in Chapter
5 of Part 5 of this Act, and
“stock lending arrangement” has the same meaning as in Part 11
of ITA 2007 (see section 568 of that Act).”
5
In section 398(1) (increase in amount or value of dividends where tax credit
30
available)—
(a)
after “a tax credit” insert “under section 397 or 397A”, and
(b)
for “section 397(1)” substitute “sections 397(1) and 397A(2)”.
6
In section 399(1) (qualifying distributions received by persons not entitled to
tax credits), after “a tax credit” insert “under section 397 or 397A”.
35
Part 2
Consequential provision
TMA 1970
7
TMA 1970 is amended as follows.
8
In section 8(1AA)(b) (personal return: amount payable by way of income
40
tax), after “397(1)” insert “or 397A(2)”.
9
In section 8A(1AA)(b) (trustee’s return: amount payable by way of income
tax), after “397(1)” insert “or 397A(2)”.

Finance Bill
Schedule 12 — Tax credit for certain foreign distributions
Part 2 — Consequential provision
217

10
In section 9(1)(b) (self-assessment of amount payable by way of income tax),
after “397(1)” insert “or 397A(2)”.
11
In section 12AA(1A)(b) (partnership return: amount payable by way of
income tax), after “397(1)” insert “or 397A(2)”.
12
In section 12AB(5) (partnership statement), in the definition of “tax credit”,
5
after “397(1)” insert “or 397A(2)”.
13
In section 59A(8)(b) (payments on account of income tax), after “397(1)”
insert “or 397A(2)”.
14
In section 59B(2)(b) (payment of income tax), after “397(1)” insert “or
397A(2)”.
10
ICTA
15
In section 824(4A)(b) of ICTA (repayment supplements: individuals and
others), after “397(1)” insert “or 397A(2)”.
FA 1993
16
In section 171(2B) of FA 1993 (Lloyd’s underwriters etc: taxation of profits
15
and allowance of losses), for “Section 397(1)” substitute “Sections 397(1) and
397A(2)”.
ITTOIA 2005
17
ITTOIA 2005 is amended as follows.
18
In section 403(1) (dividends from non-UK resident companies: income
20
charged), omit “full”.
19
In section 406 (dividends of non-UK resident companies: later charge where
cash dividends retained in SIPs are paid over), after subsection (4) insert—
“(4A)
For the purposes of determining—
(a)
whether the participant is entitled to a tax credit under
25
section 397A in respect of a cash dividend so charged, and
(b)
the amount of that tax credit,

that section applies as it has effect for the tax year in which the cash
dividend is paid over.”
20
In section 407 (dividends of non-UK resident companies: dividend payment
30
when dividend shares cease to be subject to SIP), after subsection (4) insert—
“(4A)
For the purposes of determining—
(a)
whether the participant is entitled to a tax credit under
section 397A in respect of a dividend so charged, and
(b)
the amount of that tax credit,
35

that section applies as it has effect for the tax year in which the shares
cease to be subject to the plan.”
21
In section 408 (reduction in tax due in cases within section 407), after

Finance Bill
Schedule 12 — Tax credit for certain foreign distributions
Part 2 — Consequential provision
218

subsection (2) insert—
“(2A)
In subsection (2) “the tax due” means the amount of tax due as a
result of section 407 after deduction of the tax credit determined in
accordance with section 407(4A).”
22
In section 688(1) (income not otherwise charged), omit “full”.
5
ITA 2007
23
ITA 2007 is amended as follows.
24
In section 425(5) (gift aid: deductions when calculating total amount of
income tax to which individual charged for a tax year)—
(a)
in paragraph (a), omit “and” at the end of sub-paragraph (v), and
10
(b)
insert at the end “, and
(c)
the amount of any tax credit under section 397A of
ITTOIA 2005 (tax credits for distributions of non-UK
resident companies: UK residents and eligible non-
UK residents).”
15
25
In section 504(4)(b) (provisions that do not apply to income of unauthorised
unit trusts), for “section 397(1)” substitute “sections 397(1) and 397A(2)”.
26    (1)
Section 567 (meaning of “overseas securities” etc) is amended as follows.
      (2)
After subsection (1) insert—
“(1A)
“Overseas shares” means shares in a non-UK resident company.”
20
      (3)
After subsection (2) insert—
“(2A)
“Overseas securities” includes overseas shares.”
      (4)
Accordingly, in the heading, after “of” insert ““overseas shares”,”.
27    (1)
Section 592 (no tax credits for borrower under stock lending arrangement) is
amended as follows.
25
      (2)
In subsection (1)—
(a)
in paragraph (a), insert at the end “or overseas shares,”,
(b)
in paragraph (c), omit “UK”, and
(c)
in paragraph (d)—
(i)
after “manufactured dividend” insert “or manufactured
30
overseas dividend”, and
(ii)
after “UK shares” insert “or overseas shares”.
      (3)
In subsection (2), after “397(1)” insert “or 397A(2)”.
28    (1)
Section 593 (no tax credits for interim holder under repo) is amended as
follows.
35
      (2)
In subsection (1)—
(a)
in paragraph (a), after “UK shares” insert “or overseas shares”,
(b)
in paragraphs (b) and (d), omit “UK”, and
(c)
in paragraph (e)—
(i)
after “manufactured dividend” insert “or manufactured
40
overseas dividend”, and

Finance Bill
Schedule 13 — Company gains from investment life insurance contracts
219

(ii)
after “UK shares” insert “or overseas shares”.
      (3)
In subsection (2), after “397(1)” insert “or 397A(2)”.
29    (1)
Section 594 (no tax credits for original owner under repo) is amended as
follows.
      (2)
In subsection (1)—
5
(a)
in paragraph (a), after “UK shares” insert “or overseas shares”,
(b)
in paragraph (b), omit “UK”,
(c)
in paragraph (d)—
(i)
after “manufactured dividend” insert “or manufactured
overseas dividend”, and
10
(ii)
omit “UK”, and
(d)
in paragraph (e), after “manufactured dividend” insert “or
manufactured overseas dividend”.
      (3)
In subsection (2), after “397(1)” insert “or 397A(2)”.
30    (1)
Section 595 (meaning of “manufactured dividend”) is amended as follows.
15
      (2)
For “has” substitute “and “manufactured overseas dividend” have”.
      (3)
For “section 573(1)(a)” substitute “sections 573(1)(a) and 581(1)(a)”.
31
In section 989 (definitions), in the definition of “tax credit”, after “397(1)”
insert “or 397A(2)”.
Schedule 13
20
Section 33

Company gains from investment life insurance contracts
Definitions
1     (1)
In this Schedule—
“investment life insurance contract” means—
(a)
a policy of life insurance which has, or is capable of acquiring,
25
a surrender value,
(b)
a contract for a purchased life annuity, or
(c)
a capital redemption policy,
other than a relevant excluded contract,
“relevant company” means a company which is not a life insurance
30
company, and
“relevant excluded contract” means—
(a)
an investment life insurance contract under, or purchased
with sums or assets held for the purposes of, a registered
pension scheme, or
35
(b)
(subject to sub-paragraph (3)) a policy of life insurance issued
in respect of an insurance made before 14 March 1989.
      (2)
In sub-paragraph (1)—
“capital redemption policy” means a contract made in the course of
capital redemption business (as defined in section 431(2ZF) of ICTA),
40

Finance Bill
Schedule 13 — Company gains from investment life insurance contracts
220

“life insurance company” means—
(a)
an insurance company (as defined in subsection (2) of section
431 of ICTA) which carries on long-term business (as defined
in that subsection), or
(b)
a friendly society which would be such an insurance
5
company but for the words “(other than a friendly society)”
in the definition of “insurance company” in that subsection,
and
“purchased life annuity” means an annuity—
(a)
granted for consideration in money or money’s worth in the
10
ordinary course of a business of granting annuities on human
life, and
(b)
payable for a term ending at a time ascertainable only by
reference to the end of a human life (whether or not it may in
some circumstances end before or after the life).
15
      (3)
A policy of life insurance issued in respect of an insurance made before 14
March 1989 is to be treated for the purposes of this Schedule as issued in
respect of one made on or after that date if it is varied on or after that date so
as to—
(a)
increase the benefits secured, or
20
(b)
extend the term of the insurance;

and any exercise of rights conferred by the policy is to be regarded for this
purpose as a variation.
      (4)
In this Schedule—
“fair value accounting” has the same meaning as in Chapter 2 of Part 4
25
of FA 1996 (see section 103(1) of that Act),
“non-trading credit” has the same meaning as in that Chapter (see
section 82(3) of that Act),
“registered pension scheme” has the same meaning as in Part 4 of FA
2004, and
30
“related transaction” has the same meaning as in Chapter 2 of Part 4 of
FA 1996 (see section 84(5) and (6) of that Act).
Contract to be loan relationship
2     (1)
If a relevant company is a party to an investment life insurance contract, for
the purposes of Chapter 2 of Part 4 of FA 1996 the contract is, in relation to
35
the company, a loan relationship of the company (as a creditor relationship).
      (2)
But if—
(a)
the amount or value of a lump sum payable under an investment life
contract by reason of death or the onset of critical illness, exceeds
(b)
the surrender value of the contract immediately before the time
40
when the lump sum becomes payable,

the excess is not to be brought into account as a credit under that Chapter
representing a profit from a related transaction arising by reason of the lump
sum becoming payable.
Increased non-trading credits
45
3     (1)
This paragraph applies where—