How to claim foreign withheld tax

How to claim foreign tax withheld if greater than corp tax liabilty for the year?

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Limited company client has had £10k tax withheld by a German client.

I believe we can claim double taxation relief and have entered the amount in box 450 of the CT600.

However the company’s corporation tax liability for the year is only £8k so the relief has been restricted to £8k rather than creating a £2k refund. What happens to the extra £2k?  I assume I can claim this back somehow but not sure how.

Thanks

Replies (23)

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By Accountant A
26th Sep 2019 11:57

Have you established if the £2,000 was correctly withheld? What was the tax?

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Tony s
By Tony S
26th Sep 2019 12:16

My client hasn’t received any paper work regarding the withheld tax so I can’t establish if it was correctly withheld. My client did some consultancy work for the German company through his limited company.

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Replying to Tony S:
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By garethgreen
30th Sep 2019 10:16

Tony S wrote:

My client hasn’t received any paper work regarding the withheld tax so I can’t establish if it was correctly withheld. My client did some consultancy work for the German company through his limited company.

On the face of it, the consultancy fees are business profits of the UK company. If so, by virtue of art 7 of the DTA they are likely not to be taxable in Germany unless the UK company has a German PE, which it may well not have.

You need to determine which article of the DTA applies to the income and, assuming it is article 7, you need to decide if there's a PE. This might provide grounds for a 100% refund of the WHT. (HMRC will not give a credit if the tax is refundable.)

It sounds like you are unfamiliar with these sort of issues, in which case you should obtain specialist advice, though this could easily amount to a significant share of the tax withheld. Perhaps a cheaper approach would be to start (as others have said) by challenging whether the WHT was correctly withheld and, if not, oblige the withholder to reverse it.

Also, check if the contract with the German client allows any tax to be withheld at source.

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Replying to garethgreen:
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By Rgab1947
30th Sep 2019 11:44

They must give you the tax certificate to the extend they passed the tax over to the German tax authorities. I never claim relief unless the client has the proof the tax was paid.

Else it can be a figment of the imagination. The German company or the client.

But check if there is a withholding tax requirement. Under EU law one cannot tax an EU company differently based on where they are registered. A Polish company tried with a client of mine but when challenged they backed down. And it revolves around the facts of the case.

But a lot depends on the DTA wording. You need to read it in detail.

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By Wanderer
26th Sep 2019 12:30

Did he ONLY work for the German company in the year? If not then it's unlikely that £8k can be offset against the UK CT liability.

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Replying to Wanderer:
Tony s
By Tony S
26th Sep 2019 12:46

He worked mainly for UK based clients

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Replying to Tony S:
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By Wanderer
26th Sep 2019 12:52

Then if his total CT liability is £8k it's likely that he can claim nowhere near £8k off of that. See SteLacca & Wilson's comments below.

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By SteveHa
26th Sep 2019 12:38

Why do you think HMRC will repay German tax? FTCR is restricted to the lower of foreign tax paid, or UK tax charged on the income giving rise to the claim.

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Replying to SteveHa:
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By Matrix
27th Sep 2019 02:01

No it is restricted to the treaty rate if it is lower.

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Psycho
By Wilson Philips
26th Sep 2019 12:45

First of all, you shouldn't be claiming double tax relief without suitable documentary evidence.

Second of all, as mentioned above, relief is restricted to the lower of the overseas tax and UK CT on the overseas profits. Note the important word there - "profits". You need to calculate the overseas profits using UK principles, possibly apportioning an element of overheads.

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Tony s
By Tony S
26th Sep 2019 13:25

So just to clarify;

If after taking off direct costs and apportioning overheads the “profit” made from the Germany work is £25k. UK CT on this would be £4,750 so the relief is restricted to £4,750??
Thanks

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Replying to Tony S:
By SteveHa
26th Sep 2019 13:35

Yup.

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Replying to Tony S:
Psycho
By Wilson Philips
26th Sep 2019 13:36

Correct

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Replying to Wilson Philips:
Tony s
By Tony S
26th Sep 2019 13:46

Thanks for your help guys, all makes sense now.
Never come across this before, you learn something new everyday!

Don't think my client's going to be too happy though!

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Replying to Tony S:
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By Tax Dragon
26th Sep 2019 13:57

Tony S wrote:

Don't think my client's going to be too happy though!

His recourse may be in Germany, if he's willing to incur a fee (probably best spent in Germany) to find out.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
26th Sep 2019 14:02

Agreed. He needs to establish, in the first place, whether the tax has been properly withheld. If not, he should be seeking to recover some or all of it. And also if not, he may not be entitled to any relief at all.

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Replying to Wilson Philips:
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By Tax Dragon
26th Sep 2019 14:17

Recovery may be possible even if it was properly deducted (and, if so, again there'd be a corresponding reduction of UK tax credit).

It depends on the facts.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
26th Sep 2019 14:40

Agreed!

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Replying to Tax Dragon:
By SteveHa
26th Sep 2019 15:18

This did occur to me, though since the Q was restricted to FTCR, I limited my response. Having said that, I'm in full agreement with TD and Wilson.

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By Louisemunro320
26th Sep 2019 15:11

Had a similar problem with Chinese withheld tax. HMRC CT advised our client to obtain a certificate of residency - produce this everytime (you can make multiple copies) and its supposed to stop them withholding the tax. Yet to prove if it works but this was their specialist advice

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Replying to Louisemunro320:
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By Matrix
27th Sep 2019 02:06

A certificate of residence should reduce prospective foreign withholding tax to the treaty rate. Any tax withheld above the treaty rate would have to be reclaimed since it is not creditable in the UK. I am not aware of photocopies being accepted.

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By Matrix
26th Sep 2019 16:27

You need to get the documentary evidence, determine if it is
a creditable tax for UK tax purposes (what is the name of it?) and ensure that the amount claimed is no higher than the treaty rate. Any tax withheld above the treaty rate will have to be reclaimed from Germany. Above all you will need to ensure that the tax certificate is in the name of the company and not the Director.

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By JimLittle
26th Sep 2019 22:50

Sorry on what grounds is tax withheld. There is hardly any withholding tax between member states (currently). Certainly not on services

Certainly, you need to find out the reason for withholding tax as I think their stance is incorrect.

If you do apply double tax relief then this maybe incorrect. See DTA Germany / UK

Article 29

Procedural Rules for Taxation at Source

1) If in one of the Contracting States the taxes on dividends, interest, royalties or
other items of income derived by a person who is a resident of the other Contracting State are
levied by withholding at source, the right of the first-mentioned State to apply the withholding
of tax at the rate provided under its domestic law shall not be affected by the provisions of
this Convention. The tax withheld at source shall be refunded on application by the taxpayer
if and to the extent that it is reduced or eliminated by this Convention.

2) Refund applications must be submitted by the end of the fourth year following
the tax year in which the withholding tax was applied to the dividends, interest, royalties or
other items of income.

3) Notwithstanding paragraph 1, each Contracting State may provide for
procedures to the effect that payments of income subject under this Convention to no tax or
only to reduced tax in the state of source may be made without deduction of tax or with
deduction of tax only at the rate provided in the relevant Article.

4) The Contracting State in which the items of income arise may ask for an
administrative certification by the other Contracting State that the taxpayer is a resident of
that other Contracting State within the provisions of Article 4.

5) The competent authorities may by mutual agreement implement the provisions
of this Article and if necessary establish other procedures for the implementation of tax
reductions or exemptions provided for under this Convention

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