A UK resident company that pays foreign tax on income or gains that are also charged to corporation tax can usually claim a credit for that foreign tax against the corporation tax on the same income, either under a double taxation agreement or unilaterally under the Taxation (International and Other Provisions) Act 2010 (TIOPA). The credit is capped at the UK tax on that particular income and only covers foreign tax that could not reasonably have been avoided; anything relieved by credit cannot also be deducted. Where a credit is worthless, the company can instead deduct the foreign tax from the income, and schemes designed to manufacture credit are counteracted by sections 81 to 88.

Where does a company’s right to relief come from?

There are two routes. Double taxation agreements take effect in UK law through orders under section 2 of TIOPA. Where there is no agreement, or the agreement does not cover the tax, unilateral relief under section 9 allows credit for tax paid under the law of another territory, calculated by reference to income arising or gains accruing there, that corresponds to UK income tax or corporation tax. Section 18 then reduces the corporation tax on the income by the amount of the credit. How treaties allocate taxing rights is covered in how double tax treaties work; the rules for individuals are in foreign tax credit relief.

Only the foreign tax that is properly payable counts. Section 33 limits credit to what would have been allowed if all reasonable steps had been taken, under the foreign law and any treaty, to minimise the foreign tax, including claiming reliefs and making elections. HMRC’s example in INTM161250 is a dividend suffering 25% withholding where the treaty rate is 15%: credit is given only at 15%, and no relief at all, by credit or deduction, is given for the excess. Failing to file treaty claims abroad, often supported by a UK certificate of residence, simply loses the difference.

How much credit can a company get?

Section 42 caps the credit at R multiplied by IG, where R is the rate of corporation tax the company pays for the accounting period before any credit and IG is the income or gain concerned, reduced by any deductions allocated to it. The corporation tax main rate is 25%, with a small profits rate of 19% and marginal relief between £50,000 and £250,000 of profits, so the cap depends on the company’s own effective rate.

The cap works source by source. Foreign tax on one item cannot be set against UK tax on a different item.

For trade income, section 44 narrows the cap further. The credit cannot exceed the corporation tax attributable to the income from the particular transaction, arrangement or asset, after deductions that would be allowed and expenses of connected companies so far as reasonably attributable to it. HMRC’s INTM170040 example is a bank that borrows to buy foreign shares: credit is limited to the tax on the dividend net of its funding cost.

How should deductions be allocated?

Section 52 lets a company allocate deductions that are available against more than one description of profit, such as management expenses, group relief or current year losses, in whatever amounts and to whichever profits it thinks fit. HMRC accepts (INTM167090) that this can be done to secure the maximum credit for each doubly taxed source, typically by setting general deductions against UK profits first so the foreign income keeps its full UK tax. Non trading loan relationship deficits have their own allocation rules in sections 53 to 55.

What happens to foreign tax that exceeds the limit?

As a rule, excess credit is lost. Section 35 converts disallowed credit into a deduction only so far as there is a loss attributable to the income on which the foreign tax was paid.

Foreign branches are the main exception. Under section 73, unrelieved foreign tax on the profits of an overseas permanent establishment can be carried forward against later profits of the same establishment, or back to accounting periods beginning in the previous 3 years. A claim under section 77 must be made within 4 years after the end of the period, or 1 year after the end of the period in which the foreign tax is paid if later. Excess is reduced to nil when the company ceases to have the establishment. A company that elects for the foreign branch exemption under section 18A of the Corporation Tax Act 2009 takes branch profits out of UK tax altogether, and section 18(3A) of TIOPA then denies credit for foreign tax on them.

When is a deduction better than a credit?

Section 112 reduces foreign income by the foreign tax paid on it where credit is not claimed, and section 27 allows a company to elect against credit. HMRC’s guidance (INTM161050) points to cases where trading profits are covered by capital allowances or the trade makes a loss, so there is no corporation tax for the credit to reduce. A company cannot take credit and deduction for the same item, but it can choose credit for one item and deduction for another (INTM161090).

HMRC’s own example (INTM167330): branch A makes £1,000 profit and pays £400 of foreign tax, branch B loses £1,000, and the company has £800 of loan relationship income. Trading profit is nil, so no credit is due even though the company pays tax on the £800. Deducting the £400 turns the trade result into a £400 loss that can be set against the £800.

Dividends need separate thought. Most dividends received are exempt under Part 9A of the Corporation Tax Act 2009, so there is no UK tax to credit withholding tax against; see dividends received by companies. Section 931R lets the recipient elect that a distribution is not exempt, within two years after the end of the accounting period in which it is received, which can occasionally make credit worthwhile.

What are the time limits and reporting duties?

  • A claim for credit against corporation tax must be made within 4 years after the end of the accounting period, or, if later, 1 year after the end of the accounting period in which the foreign tax is paid (section 19(3)).
  • Where foreign or UK tax is later adjusted, section 79 allows a claim or assessment up to 6 years from when all material determinations have been made.
  • If a foreign tax refund or adjustment makes a credit excessive, section 80 requires notice to HMRC within one year. The penalty for failing to notify can be up to the amount of the excess credit.
  • Section 34 reduces the credit by any payment a tax authority makes by reference to the foreign tax to the company, a connected person or anyone under a scheme.

What anti avoidance rules limit the relief?

Sections 81 to 88 counteract credit generated by schemes. All four conditions in section 82 must be met: credit is allowable for foreign tax; a main purpose of a scheme or arrangement is to cause foreign tax to be taken into account; the scheme falls within section 83; and the total credit claimed, with connected persons’ claims, is more than minimal. Section 83 points to sections 84 to 88, which describe schemes where:

  • foreign tax is properly attributable to a different source of income (section 84);
  • the claimant, taken with other parties, does not bear the full economic cost of the foreign tax (sections 85 and 85A, the latter covering deemed foreign tax);
  • a claim or election increases the credit, or one that would have reduced it is not made (section 86);
  • the scheme leaves the claimant and connected persons paying less UK tax than without it (section 87); or
  • the source of income was acquired in return for a tax deductible payment (section 88).

Where the conditions are met, the effects are counteracted by just and reasonable adjustments. HMRC’s view (INTM170010) is that the rules do not apply to transactions entered into for wholly bona fide commercial purposes. Finance Act 2018 substituted section 81 and omitted sections 89 to 95, which had required HMRC to issue a counteraction notice, so the company must now consider the rules itself when it self assesses. Profits caught by the controlled foreign companies charge have their own credit rules.

How might the numbers work?

Illustration only. A UK company paying corporation tax at 25% receives £100,000 of royalties from an overseas licensee. The foreign domestic withholding rate is 20%, but the treaty rate is 10%. The company did not submit the treaty claim, so £20,000 was withheld. It allocates £40,000 of directly attributable costs to the royalty income.

  • Section 42 cap: (£100,000 minus £40,000) at 25% = £15,000.
  • Section 33 limit: only the 10% treaty amount, £10,000, is creditable.
  • Credit allowed: £10,000. UK corporation tax on the royalty: £15,000 minus £10,000 = £5,000.
  • The other £10,000 gets no UK relief. It has to be reclaimed from the foreign tax authority.

What are the common mistakes?

  • Claiming credit for withholding above the treaty rate instead of reclaiming it abroad.
  • Setting general deductions against foreign income when section 52 would let them go against UK profits.
  • Claiming credit for loss making or allowance covered branches instead of deducting the tax or carrying it forward.
  • Forgetting the section 80 notice when the foreign authority later refunds tax.
  • Claiming credit on exempt dividends, or on branch profits after a section 18A election. The general corporation tax framework is in corporation tax explained.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.