Following a request from a member, in this article we look in detail at the tax treatment of foreign dividends received by a UK company.
The tax treatment of foreign dividends for UK companies was substantial changed in the 2009 Finance Act.
The starting point of the new rules is to provide that in principle all distributions are taxable. However, these provisions are not to apply to distributions of a capital nature. The rules go on to set out the separate exemptions applying to-
Small companies.
Medium and large companies.
Small companies
The definition of a small company is taken from an EC Commission definition
issued in 2003. A small company is one with:-
Employee headcount below 50, and
Turnover below Euros 10m or a balance sheet total below Euros 10m.
Small company exemptions
The key exemptions for distributions received by a small company apply where
the payer is:-
A UK resident company, or
A company resident in a qualifying country, being a country with which the
UK has a double tax treaty with a non discrimination clause.
The practical implications of these rules for foreign distributions received by small companies may be summarised as follows:-
Distributions from major countries, covering all EU countries, US, Japan,
China, Switzerland and many more, will be exempt.
Distributions from low tax jurisdictions such as Jersey, Guernsey, Isle of
Man, Bermuda and Lichtenstein will remain taxable.
Medium and large company exemptions
There are five exemptions applying to distributions received by non small
companies. Distributions may fall into more than one of these classes, as they are not mutually exclusive. The five exemptions are:-
Distributions from controlled companies. This provides an
exemption for distributions to a parent company, including some joint
venture companies.
Distributions in respect of non-redeemable ordinary shares. A share
is an ordinary share provided that it carries no preferential rights to income
or capital.
Distributions in respect of portfolio holdings. These are defined as
holdings that represent less than 10% of their class of share. This limit must
be met by reference to each of capital, income rights and capital rights.
Dividends derived from transactions not designed to reduce tax.
This exempts dividends to the extent that they are paid out of profits that did
not derive from transactions that achieve a UK tax advantage (a negligible
tax advantage is ignored.) If there are profits arising from the intention to
reduce tax, any dividends are matched against these profits first (and would
therefore not be exempt under this heading).
Dividends from shares e.g. preference shares, that the issuer accounts for
as liabilities are exempt under this heading, except where these shares are
held for a tax avoidance purpose.
The medium and large company exemptions don't contain an express exemption for distributions received from another UK company. Instead, a tax exemption must be sought under one of the above headings.
Anti avoidance rules
There are anti avoidance provisions specific to each of the five exemptions for
medium and large companies, and to the exemptions for small companies.
There are exceptions from exemption for all companies in respect of distributions of interest that are treated as a distribution because they are paid at more than a commercial rate, and for dividends that qualify for a tax deduction in the payer's country. These distributions are therefore taxable.
A company may elect for a distribution that would otherwise be exempt to be
taxable.
