Commentary on Sections Changes in partnership Section 1266: Resident partners and double taxation agreements
3224.This section ensures that a UK resident company partner’s share of the income of a foreign firm remains liable to United Kingdom corporation tax even though the income of the firm as a whole is exempt from United Kingdom corporation tax in accordance with a double taxation agreement. It is based on section 115 of ICTA. The corresponding rule for income tax is in section 858 of ITTOIA.
3225.The business profits article of the United Kingdom/Jersey double taxation arrangement exempts the profits of a Jersey firm from United Kingdom tax. In the case of Padmore v CIR (1989), 62 TC 352 CA(7), the Court of Appeal decided that the exemption extended to the share of the profits arising to a United Kingdom resident individual. The rules in section 115(5) to (5B) of ICTA were enacted to remove the exemption.
3226.Subsection (1) sets out the type of company and firm with which the section is concerned. It goes on to identify the sort of exemption from tax that was considered in the Padmore case.
3227.For United Kingdom tax purposes, if it is necessary to consider where a firm is resident, the question is likely to be decided by the place where the firm’s business is controlled and managed. But it is possible that, under foreign law, a firm may be considered to be resident elsewhere, for example, by reference to where the firm was established. So the section uses both the “control and management” test and the “resides” test.
3228.Subsection (2) makes it clear that the section does no more than remove any exemption under a double taxation arrangement. It does not deny other reliefs, such as tax credit relief. See Change 87 in Annex 1.
3229.Subsection (3) deals with United Kingdom tax credits, which may be relevant to the calculation of a company’s “shadow ACT” (see SI 1999/358, made under section 32 of FA 1998). A double taxation arrangement may give a non-UK resident “person” an entitlement to payment of a tax credit on a distribution by a United Kingdom company. This subsection makes it clear that, where that “person” is a firm, only a UK resident partner has the entitlement.
3230.Section 115(5A) of ICTA applies also to capital gains. That part of the rule is not rewritten in this Act. It is moved to TCGA by an amendment to section 59 of TCGA (see Part 2 of Schedule 1 to this Act).