New Dividend Rules

By | 3 October 2009

Recent changes

Accountants and tax advisers who were familiar with the concept that a dividend paid by one UK company to another UK company was not generally liable to corporation tax will need to think again, following legislation introduced in Finance Act 2009.

Bad news or good news?

Under the new rules, the basic position is that all distributions paid on or after 1 July 2009 are liable to corporation tax, regardless of whether it is paid by a UK resident or foreign company.

However, this is not necessarily the bad news that it first seems. The new rules contain various exemptions from a corporation tax charge. In practice, the new legislation will result in the vast majority of dividends between UK companies continuing to be exempt as before. In addition, many dividends paid by non-UK resident companies to UK resident companies will no longer be liable to corporation tax.

Small companies

There is a specific exemption for distributions received by small companies, if certain conditions are satisfied. These are broadly (CTA 2009, s 931B):

  • The paying company is resident in either the UK or in a ‘qualifying territory’ (as defined), and is not also dual resident.
  • The payment must not be an amount of interest that is treated as a distribution for tax purposes (under ICTA 1988, s 209(2)(d) or (e)).
  • A deduction is not allowed to any foreign resident in respect of the distribution.
  • The distribution is not paid as part of a ‘tax advantage scheme’ (as defined).  

A ‘small company’ for these purposes is broadly one with less than 50 staff, and either a turnover or balance sheet total of not more than 10 million Euro. Any ‘partner’ or ‘linked’ enterprises are also taken into account, and certain types of company (e.g. authorised unit trust schemes) are not treated as ‘small’ for these purposes (CTA 2009, s 931S).

Other companies

For companies other than small companies, three conditions must be satisfied for distributions to be exempt:

  • The distribution falls into an exempt class.
  • The payment must not be an amount of interest that is treated as a distribution for tax purposes (under ICTA 1988, s 209(2)(d) or (e)).
  • A deduction is not allowed to any foreign resident in respect of the distribution (CTA 2009, s 931D).

In addition, the distribution must not be prevented from falling into an exempt class because of certain anti-avoidance rules included in the new legislation.

There are five exempt classes:

  • Distributions from controlled companies.
  • Distributions in respect of non-redeemable ordinary shares.
  • Distributions in respect of portfolio holdings.
  • Dividends derived from transactions not designed to reduce tax.
  • Dividends in respect of shares accounted for as liabilities.

For client companies which are not ‘small’, the first two exemptions above are likely to be most common. A dividend would only need to fall into one of the exempt classes, unless an anti-avoidance rule applies.

A good thing?

The new regime will no doubt be welcomed by most UK companies in receipt of dividends from foreign subsidiaries, who (subject to the anti-avoidance rules) can now treat those dividends as free of UK tax.

In the case of (for example) dividends received from other UK companies, in most cases there will be no corporation tax liability. However, whereas previously such dividends were automatically exempted from corporation tax, it will now be necessary to check the legislation to ensure that the distribution falls within one of the exempt categories, and is not caught by an anti-avoidance provision.

The above article is reproduced from ‘Practice Update’ (September/October 2009), a tax Newsletter produced by Mark McLaughlin Associates Ltd. See the Newsletters section.