Tax exemption in the 2009 PBR for dividends from overseas subdidiary?

UK companies could use offshore companies to trade overseas and avoid UK tax. Provided the offshore companies were controlled from overseas and were carrying out an overseas trade there would be no UK tax on the profits. This assumes that the offshore company wasn't caught by the controlled foreign company ('CFC') rules. The problem with this was that in many cases this was only a deferral. If the profits of the offshore company were to ever be transferred back to the UK there could either be:

A dividend from the offshore subsidiary to the UK company, or

The offshore company could be wound up and the cash remitted back to the UK as a capital distribution In either case there could be a UK tax charge. A dividend from the offshore company to the UK company would be subject to UK corporation tax. On a liquidation of the offshore company corporation tax would be due on any capital gain. If the subsidiary had a nominal share acquisition cost this would charge the entire profits to UK tax. Therefore the offshore sheltering was more apparent than real. It's been suggested that as part of the tax package in the 2009 PBR the Chancellor will provide an exemption for corporation tax purposes on dividends from overseas subsidiaries. If this was the case this would mean that offshore companies could transfer cash back to UK resident companies free of UK tax as a dividend. This opens up the door for lots more tax planning opportunities. We'll be providing members with analysis of the 2009 PBR changes as well as answering specific tax questions.