Parent Companies, and their Dividends from Subsidiaries? HELP!

Parent Companies, and their Dividends from...

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Hi All,

This may seem to many a bit of a simple question, but it is something I have never got involved with, and so I want to be clear. So sorry for sounding like a dunce.

This has turned into quite a long question, but your help is very much appreciated, and any help you could offer would be gratefully received.

I run a company, but would like to set up another, in the same industry, but to be run as a 'Premium' brand.

The reason being that if I offered the same services and products in the existing company, it would 'pollute' the reason I set up the company, however I can see a very good reason for setting up the new company.

I want to keep the brands very separate from each other, and so simply having two trading names of the Limited company wouldn't work.

My intention is to have a Parent Company, which wholly owns the two companies.

I understand that the Small Companies rate will be at a third of the normal level for each company, because they are obviously related.

There will be shared expenses, for example, Rent, Rates, Employees etc, and this would be done through the Parent Company, and appropriate amounts would be paid to the Parent Company by each Subsidiary.

I then intend to pay dividends from each Subsidiary into the Parent Company, when necessary, which would then pay Dividends to the Shareholders when appropriate.

My primary question in all of this is that, obviously each company will pay Corporation Tax on its Profits, but what happens about the Dividends paid into the Parent Company.

I assume that the tax deducted from the dividends can be taken from any tax owing by the Parent Company, however this is only at 10% (of the gross), so what happens in the Parent Company - i.e. Does it pay 20% Corporation Tax on the Gross Dividends?

If so, wouldn't that mean that the group was paying tax twice on the profits?

Any help anyone could offer would be very much appreciated. I guess it is quite a simple answer, but I obviously want to be clear, because as they say, It's not what you know you know, or what you know you don't know thats the problem, its what you don't know you don't know, so I want to be as careful as possible!

Merry Christmas.

David

Replies (9)

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By thisistibi
20th Dec 2010 11:33

Exempt

Dividends from UK companies used to be exempt from UK Corporation Tax (so called Franked Investment Income).  They recently changed the rules but essentially the effect is the same - you will fall within one of the exempt classes of dividend (due to being a dividend from a controlled company) under s931E CTA 2009.

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By qayyum
20th Dec 2010 11:50

Group dividends

 

For corporation tax purposes, the dividends and distributions received from other UK fresident companies are excluded - see CTA 2009 section 1285.

 

Abdul

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By User deleted
20th Dec 2010 12:14

Thank you both very much for your help.

Merry Christmas

David

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By PennyC
20th Dec 2010 12:45

Dangerous to rely on advice on AWeb!

CTA 2009 s1285 is no longer in force, so that advice is out of date.

S931E may very well apply, but so might S931J, so that advice is incomplete.

So, AWeb may be useful for general pointers, but for advice you can rely on, seek the services of a professional adviser.

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By thisistibi
20th Dec 2010 13:39

@PennyC

Penny - I find your comments slightly offensive.  Each one of us comes here to try and help other people out of kindness only.  It goes without saying that the recipient of the advice must verify the accuracy of AW advice for themselves.  You could write a similarly stupid comment on every single thread in the forum.  Clearly the advice you are going to get on AW does not have the same caveats as a professional advisor's firm, and does not address all anti-avoidance legislation & case law which might be in point. 

However, I must confess that I assumed the original poster's company is not "small".  If it is "small", the dividend exemption at s931B will apply instead (not that it changes the advice, just the section number).

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By PennyC
20th Dec 2010 15:10

To the easily offended

No offence was intended. But I do not agree that 'it goes without saying' that the veracity of AWeb advice should be checked. I'm sure there are those who ask a question here, get a response based on outdated legislation, and accept that response for what it is.

If I go to a plumbing forum to ask how to replace a ballcock valve, should I then call in a plumber to confirm that the advice is correct? Kind of makes the advice valueless if you can't trust it, don't you think?

And, yes, the small company exemption may well apply here - but I would not be so bold to say that it will apply.

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By thisistibi
20th Dec 2010 15:45

@PennyC

I think you need to spend some time in the real world..... do you really imagine that every time you ask a plumber something, he/she gives you the right answer?  Do you really think all accountants give their clients correct tax advice?

The orginal poster got exactly the kind of tax advice they were after.  If everyone on this forum gave advice the way you suggest it, it wouldn't be worthwhile for anyone concerned...

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By PennyC
20th Dec 2010 16:00

Dear, oh dear

The bad weather really has turned some people grumpy, hasn't it.

In case you hadn't noticed, I was responding to two specific points:

An unqualified statement that dividends would be exempt as a consequence of legislation that is now out of date.

Unqualified statements that the dividends would be (not probably would be) exempt.

I'm sorry if you find it offensive that I've questioned your advice, but I've no less of a right to draw readers' attention to incorrect or inadequate responses than the respondents have to post those potentially misleading answers in the first place.

I don't think the questioner did get the kind of advice they were after. "so I want to be as careful as possible" That implies that the questioner wanted an accurate and correct explanation of how the dividends would be treated. Neither of the first two answers met that requirement - if followed, either could have given rise to unexpected tax liabilities (probably not, but still a possibility - therefore making definitive statements to the contrary look rather foolish). 

And, yes, I do live in the real world - having encountered only recently a client that had been told that, as a small company, dividends would be exempt. The previous adviser having previously overlooked the fact that the dividend payer was Jersey-resident and that as a small company my new client did not benefit from the portfolio exemption and was in fact liable to tax on those dividends.

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By Geoff123
03rd Mar 2014 11:44

Corporation tax and dividends from subsidiaries

Simple question, are the dividends received by the parent company subject to the corporation tax calculation ?

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