Section 16 | Rule 8: credit for underlying tax on dividend paid by exchanged associate

(1)This section applies for the purposes of section 12(1).

(2)Credit under section 9 for overseas tax on a dividend paid by a company (“P”) resident in the territory is allowed if each of conditions A to C is met.

(3)Condition A is that—

(a)the recipient of the dividend is a company resident in the United Kingdom, or

(b)the recipient is a company resident outside the United Kingdom but the dividend forms part of the profits of a permanent establishment of the recipient in the United Kingdom.

(4)Condition B is that the recipient—

(a)directly or indirectly controls, or

(b)is a subsidiary of a company which directly or indirectly controls,

less than 10% of the voting power in P.

(5)If condition B is met, in subsection (6) “the held percentage” means the voting power in P which is directly or indirectly controlled by—

(a)the recipient, or

(b)a company of which the recipient is a subsidiary.

(6)Condition C is that—

(a)the held percentage has been acquired in exchange for voting power in another company (“X”),

(b)before the exchange, the recipient—

(i)directly or indirectly controlled, or

(ii)was a subsidiary of a company which directly or indirectly controlled,

at least 10% of the voting power in X,

(c)the recipient shows that the exchange (and any reduction after the exchange)—

(i)could not have been prevented by any reasonable endeavours on the part of the recipient, a parent or an associate, and

(ii)was due to a cause or causes not reasonably foreseeable by the recipient, a parent or an associate when control of the relevant voting power was acquired, and

(d)the recipient shows that no reasonable endeavours on the part of the recipient, a parent or an associate could have restored, or (as the case may be) increased, the held percentage to at least 10%.

(7)For the purposes of subsection (6) a company is an “associate” if—

(a)the company is neither the recipient nor a parent,

(b)before the exchange, the voting power in X that is in question was controlled otherwise than directly by the recipient, and

(c)the company is relevant for determining whether, before the exchange, the recipient—

(i)indirectly controlled, or

(ii)was a subsidiary of a company which directly or indirectly controlled,

at least 10% of the voting power in X.

(8)In subsections (6) and (7) “parent” means a company of which the recipient is a subsidiary.

(9)In subsection (6) “the relevant voting power” means—

(a)the voting power in X as a result of which relief was due under section 14 before the exchange, or

(b)if control of the whole of that voting power was not acquired at the same time, that part of the voting power of which control was last acquired.

(10)For the purposes of this section, the recipient is a subsidiary of another company if the other company controls, directly or indirectly, at least 50% of the voting power in the recipient.