Gabelle Tax Analysis: New guidance on the treatment of dividends

On 21 November HMRC published new guidance on the treatment of dividends received by UK companies from companies registered in an overseas territory, and in particular looking at what types of payment constitute dividends.

In most cases distributions received by UK companies are exempt from corporation tax. This applies so long as, where the recipient is a small company, the paying company is resident in a “qualifying territory” (which is defined in CTA 2009, s 931A) or where the recipient is not small, it falls within a number of exempt classes (set out in ss 931E to 931Q).

If a dividend does not fall within any of these exemptions, it will be subject to corporation tax, subject to a credit for foreign tax deducted.

The definition of distribution is set out in CTA 2010, s 1000(1), and includes:

  • Any dividend, including a capital dividend (which simply means a dividend paid out of capital profits) (s 1000(1)A), and
  • Any other distribution out of the assets of the company made in respect of shares, except to the extent that the distribution represents a repayment of capital on the shares or is equal to any new consideration received by the company (s 1000(1)B).

Capital on the shares will usually include nominal share capital plus share premium or anything that is broadly equivalent in the foreign jurisdiction. If a share premium account in the foreign jurisdiction is a distributable reserve, any payment out if it is treated as a distribution for UK corporation tax purposes.

Where there is a payment out of a reserve created on a repayment or repurchase of share capital, this is treated as a distribution. This is because the reserve would have been created out of distributable profits, and the original repayment or repurchase would, in most cases, have been treated as a capital gains transaction.

Payments to individuals following share capital reduction

HMRC have also produced guidance on the treatment of payments out of a reserve created following a repayment of share capital or share premium, which may have been created in accordance with The Companies (Reduction of Share Capital) Order 2008. Where there is a payment out of this reserve it will be treated as a distribution under s 1000(1)B.

What to look out for

Whenever a company makes a payment to its shareholders that is not a straightforward payment out of profit and loss account reserves that are available for distribution, the nature of that payment needs to be ascertained to ensure that the correct treatment is applied.

When a UK company receives a dividend from an overseas company the first issue to consider is whether it falls within one of the exemptions. If it does not, the dividend is likely to be taxable, in which case the level of tax credit should be ascertained.

Paul Howard is a Director at Gabelle LLP. He can be contacted at paul.howard@gabelletax.com or via TaxDesk on 0845 4900 509.