Focus on Tax: Preventing Double Taxation

Friday 3rd March, 2023

UK court allows UK tax credit for US withholding tax 

With continued expansion of UK businesses overseas, the below summary of a recent UK tax case serves as a reminder of the current legal position on availability of foreign tax credits in the UK and may be relevant to those UK companies who engage in cross-border activities.

In this case, the UK Upper Tribunal allowed a UK company to obtain a tax credit for the withholding tax suffered in the US on its trans-Atlantic interest income.

The case, HMRC v Aozora [2022] UKUT 0258 (TCC), concerned the Aozora’s entitlement to the UK domestic unilateral tax credit. The UK has one of the largest double tax treaty networks with over a hundred such agreements (“DTAs”). Usually, where a UK taxpayer is subject to tax both in the UK and abroad on the same income, the taxpayer would claim relief under a DTA. If there is no DTA, or a DTA does not apply, the UK may allow a unilateral tax credit for the tax suffered abroad.


The facts in HMRC v Aozora were as follows:

  • Aozora, a Japanese bank with global operations, had a UK subsidiary (“Aozora UK”), which in turn held a US subsidiary (“Aozora US”). Aozora UK lent money to Aozora US with a 12% interest rate. US withholding tax of approximately $14 million was imposed and paid by Aozora US to the IRS. Aozora UK tried to claim a refund of this tax on the basis that that Aozora qualified for an exemption under the US-UK DTA.
  • Because of Aozora’s ultimate Japanese ownership, the IRS applied the “limitation of benefits” article under the US-UK DTA (“LOB Article”). The LOB Article is a type of anti-treaty shopping clause intended to prevent companies being interposed in jurisdictions merely to exploit that jurisdiction’s favourable DTA terms. The IRS decided that Aozora UK was not a ‘qualified person’ under the LOB Article and was not entitled to a refund of the US tax.
  • When filing its UK tax returns, Aozora UK then claimed unilateral relief by way of credit under section 790 of the Income and Corporation Taxes Act 1988 (“ICTA 1988”) (since rewritten as section 11(3) of Taxation (International and Other Provisions) Act 2010). However, HMRC denied the relief by way of tax credit and instead calculated the relief under section 811 of ICTA 1988 by way of a tax deduction, which resulted in much lower relief for Aozora UK. Aozora UK took the case to the First Tier Tribunal (“FTT”).

First Tier Tribunal decision

The FTT found that the unilateral tax credit was available to Aozora UK.

The judgment centred around the UK legislation, specifically section 793A(3) of ICTA 1988, which states:

“Where arrangements made in relation to a territory outside the United Kingdom contain express provision to the effect that relief by way of credit shall not be given under the arrangements in cases or circumstances specified or described in the arrangements, then neither shall credit by way of unilateral relief be allowed in those cases or circumstances”.

The FTT decided that the LOB Article contained in the US-UK DTA did not explicitly set out the details of the circumstances in which the credit relief would not be available. Accordingly, this article was not an express provision that could disapply the availability of the unilateral tax credit under section 793A.

The FTT also concluded that the unilateral tax credit relief should not be automatically denied under UK domestic law if an exemption was not available under the US-UK DTA to preserve reciprocity under the international treaty.

Upper Tribunal decision

On appeal by HMRC, the Upper Tier Tribunal (“UT”) agreed with the FTT’s judgment.

Focusing on the statutory interpretation and construction of the UK domestic law, the UT concluded that the wording in section 793A(3) of ICTA 1988 had to be interpreted objectively and purposively. The UT cited the following useful extracts from judgments on statutory interpretation:

“…Words and passages in a statute derive their meaning from their context. A phrase or passage must be read in the context of the section as a whole and in the wider context of a relevant group of sections. Other provisions in a statute and the statute as a whole may provide the relevant context. They are the words which Parliament has chosen to enact as an expression of the purpose of the legislation and are therefore the primary source by which meaning is ascertained.” (Lord Hodge in R(Project for the Registration of Children as British Citizens) v Secretary of State for the Home Department [2002] 2WLR 343) and

“…The task of the court is often said to be to ascertain the intention of Parliament expressed in the language under consideration. This is correct and may be helpful, so long as it is remembered that the ‘intention of Parliament’ is an objective concept, not subjective. The phrase is a shorthand reference to the intention which the court reasonably imputes to Parliament in respect of the language used. It is not the subjective intention of the minister or other persons who promoted the legislation. Nor is it the subjective intention of the draftsman, or of individual members or even of a majority of individual members of either House . . .” (Lord Nicholls in Spath Holme [2001] 2AC 349).

Using this approach, it was clear to the UT that the meaning of section 793A(3) of ICTA 1988 had to be discerned primarily from its wording and that the purpose of this section is to prevent a unilateral tax credit where a certain type of provision is expressly included in a DTA.

On this basis, if a provision in a DTA “expressly” disallows a tax credit to a non-qualified person, then no claim can be made in the UK for unilateral tax credit.

However, the UT found that the LOB Article in the US-UK DTA did not expressly set out the circumstances in which credit relief was not available. Instead the article set out the circumstances in which the benefits of the DTA were available.

The UT made the subtle point that, while the LOB Article had the effect that a tax credit was not available, it was not an express provision to the effect that a tax credit was not available. Given that the Parliament used the latter wording, the UT’s view was that one had to look for an article in a DTA that expressly provided for denial of credit relief rather than focusing on any article that could potentially invalidate such relief. It was clear to the UT that the LOB Article was not such an article.

As a result, the UT concluded that Aozora UK could claim credit for the withholding tax paid in the US.

Our view

This case is a rare opportunity for UK corporate taxpayers and their advisers to have an insight into how a UK tax court interprets the UK tax legislation and international tax treaties. It is a welcome decision in the context of cross-border payments that have suffered foreign tax.

The judgment clearly shows that the UK foreign tax credit provisions need to be interpreted simply and objectively. Although this was a positive result for Aozora UK, UK taxpayers who do not qualify for a tax exemption under a DTA should review the wording of the relevant provisions very carefully to establish if a UK unilateral tax credit would be available to them. In any case, the decision should provide confidence to some UK taxpayers who fail to meet the conditions of a DTA in that UK unilateral relief may be available to prevent double taxation.

Please contact Katerina Heal and Michael Hansby if you would like to discuss anything in this article.