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Tribunal allows unilateral credit for US withholding tax even though no treaty relief available due to 'limitation on benefits' article

16 November 2022. Published by Harry Smith, Senior Associate

In Aozora GMAC Investments Ltd v HMRC [2022] UKUT 258 (TCC), the Upper Tribunal (UT) has upheld the decision of the First-tier Tribunal (FTT) that section 793A(3), Income and Corporation Taxes Act 1988 (ICTA), did not prevent a UK taxpayer obtaining unilateral relief from UK tax in respect of US withholding tax despite failing to qualify for treaty relief due to the 'limitation on benefits' (LOB) clause in the US/UK double tax treaty.


Aozora GMAC Investments Ltd (Aozora) was a UK-resident subsidiary of a Japanese bank.  Aozora itself had two subsidiaries in the US, one of which, in November 2006, borrowed from it $217,770,000 for a little over 10 years at a fixed annual interest rate of 12%.  

Interest income accrued on the loan for the periods ending March 2007 to March 2009, and the US subsidiary withheld US tax from each payment, as required by US law.  In March 2008, Aozora applied to the US tax authorities for relief under the US-UK double tax treaty (the DTT), but the application was refused on the basis that the LOB clause in the DTT applied.


Article 11 of the DTT provides that interest arising in one Contracting State and beneficially owned by a resident of the other is taxable only in the other state (where the taxpayer is resident).

Article 24(4)(a) of the DTT provides that in certain circumstances, US tax payable in the US shall be allowed as a credit against any UK tax computed by reference to the same profits, income or chargeable gains. 

Article 23 of the DTT contains the LOB clause and provides that the benefits of the DTT apply (subject to limited exemptions) only to a 'qualified person' fulfilling certain conditions.

Section 790, ICTA, provided, at the material time, that unilateral relief was to be given in respect of tax payable on income and chargeable gains to the extent taxed overseas by allowing a credit against UK income tax or corporation tax.  Section 793A, ICTA (now section 11(3), Taxation (International and Other Provisions) Act 2010) operated, at the material time, to deny unilateral relief in circumstances where certain double tax treaties (including the DTT) allow credit in respect of an amount of tax.  In particular, section 793A(3) provided that: 

"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".

Unable to obtain relief from withholding at source in the US, Aozora claimed unilateral relief by way of credit under section 790, ICTA.  HMRC issued closure notices on the basis that section 793A(3), ICTA, prevented Aozora from obtaining relief.  

Aozora appealed to the FTT.

FTT decision

The appeal was allowed.

In the view of the FTT, the DTT was not explicit as to the circumstances in which credit relief was to be denied and Article 23 was not an express provision to the effect that relief by way of credit shall not be given.  The purpose of section 793A(3) was not to ensure that a balance negotiated between parties to double tax treaties was upset – double tax treaties were not executed with a view to determining how the UK would tax its own residents.  The DTT itself envisaged that taxpayers might face a lighter burden of taxation domestically than under the DTT.  

The FTT held that although tax considerations had played a part in the decision to finance Aozora's US subsidiary through the UK, rather than directly from Japan (home of its ultimate parent), this did not preclude unilateral relief from applying.  

The FT's decision can be viewed here.

HMRC appealed to the UT.

UT decision

The appeal was dismissed. 

The UT considered the purpose of section 793A(3) and concluded that the cases or circumstances in which it operated to deny credit were 'specified or described' in the relevant provision of a treaty.  

The LOB clause in the DTT was not a provision in which the denial of credit was specified or described.  Instead, it had the effect of not obliging either party to grant treaty credits to a non-qualified person who did not meet the conditions set out in Article 23(3) or (4).  The UT noted, in particular, that the US government had the discretion to allow relief.   The proper interpretation of the LOB was that, to the extent that the DTT conferred benefits on residents, it was confined to qualified persons and others who satisfied the conditions set out in Article 23(3) or (4).  

The LOB did not, therefore, activate the provisions of section 793A(3), and HMRC's appeal was denied.  

The UT commented that a broader interpretation of section 793A(3) would have the result that unilateral relief could "arguably be denied in surprising circumstances" and would "introduce material uncertainty".  


This decision turns very much on the wording of the LOB clause in the DTT.  While the US was an early adopter of LOB clauses in its double tax treaties, they are becoming increasingly commonplace as a result of BEPS action 6 and the drive to prevent 'treaty shopping'.  Although this decision cannot be directly read across to other treaties with LOB clauses, the narrow interpretation of section 793A(3) adopted by the UT (and in particular its note of caution regarding the consequences of adopting a broader interpretation) is welcome.

The decision can be viewed here.

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