Draft legislation on personal dividend tax credits
Background
The 2008 Budget included an announcement that legislation will be introduced in Finance Bill 2009 to extend eligibility for the non-payable dividend tax credit 'to individuals in receipt of dividends from non-UK resident companies where the individual owns a 10 per cent or greater shareholding in the distributing company. The tax credit will not be available if the source country does not levy a tax on corporate profits similar to corporation tax. There will be anti-avoidance measures to ensure that these new rules are not subject to abuse.'(Budget Notice 29)
Current law
Dividends received by individual shareholders are taxed at rates of 10 per cent and 32.5 per cent for basic rate and higher rate taxpayers respectively.When dividends from UK resident companies are charged to tax, shareholders are entitled to a non-payable tax credit of one ninth of the distribution under the provisions of section 397 (1) of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). Because tax is charged on the gross dividend received, including the tax credit, this lowers the effective rates of tax on these dividends at the personal level to 0 per cent and 25 per cent.
With effect from 6 April 2008, Section 397A of ITTOIA, introduced by the Finance Act 2008, extended the non-payable tax credit to individuals in receipt of dividends from non-UK resident companies if they own less than a 10 per cent shareholding in the distributing company and that company is not an offshore fund.
Future treatment
The Finance Bill 2009 will include measures that will further extend eligibility for the non-payable tax credit in line with the Budget 2008 announcement.
For shareholders with holdings of 10 per cent or more in a non-resident company, the tax credit will normally be available if the distributing company is resident in a territory with which the UK has a double taxation agreement with a non-discrimination article ('qualifying territory'). This approach is already used in the transfer pricing provisions (Schedule 28 AA of the Income and Corporation Taxes Act 1988). The legislation will also include powers to vary what is a 'qualifying' and 'non-qualifying' territory.
We envisage that there will also be additional anti-avoidance measures, which will accompany the legislation in Finance Bill 2009.
How to respond
We welcome your responses on the draft legislation. Any comments, or any technical queries, should be sent to:
Mrs Andrea Pierce
CT Structure Team
HMRC
Room 3/35
100 Parliament Street
SW1A 2BQ
Email: Andrea Pierce
Comments should be received by Friday 20 February 2009.
Disclosure of Responses
Information provided in responses, including personal information, may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 and the Environmental Information Regulations 2004).
If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals, amongst other things, with obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential.
If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on the Department.
If you have any queries concerning confidentiality or the FOI then they should be directed in the first instance to Andrea Pierce at the above address.
The legislation in detail
Clause 1
The clause introduces Schedule 1 and includes the commencement provisions. Clause 1 (2) ensures that only relevant distributions arising, paid over or treated as paid in the tax year 2009-10, or subsequently, can qualify for the dividend tax credit. Any dividends that are to be taxed on the remittance basis and which are received in the UK on or after 6 April 2009, will not qualify if they arose, were paid over or treated as paid in an earlier tax year.
Schedule 1
Paragraph 1 provides for ITTOIA 2005 to be amended.
Paragraph 2 (1) provides for amendment of section 397A, which was introduced in the Finance Act 2008 to cover the extension of the dividend tax credit to distributions made by non-resident companies where the shareholding owned by the individual shareholder is less than 10 per cent.
Paragraph 2 (2) to (4) extend the dividend tax credit to all relevant distributions made by a non-UK resident company but with the important proviso that this does not apply if at the time the distribution is received by the taxpayer, the company is a resident of a 'non-qualifying territory' and the recipient is a 'substantial shareholder' in the company.
Paragraph 2 (5) and paragraph 3 are minor drafting amendments.
Paragraph 4 inserts a new section 397BA which sets out the meaning of 'non-qualifying territory'.
New section 397BA (1) to (4) is based on paragraph 5E of Schedule 28AA of ICTA 1988 (the transfer pricing rules). 397BA (5) provides an additional flexibility. It allows for regulations made under this section to make different provision in relation to different descriptions of company. For example, there are cases where certain companies in a territory are excluded specifically from the double taxation agreement or are not treated as a resident of the territory for the purposes of the double taxation agreement.
Draft regulations to be made under these provisions are not yet available. However, as any regulations cannot be made until after the Finance Bill 2009 has received Royal Assent, there will be plenty of opportunity for prior consultation.
New section 397BA (6) makes regulations under the section subject to the affirmative procedure.
Paragraph 5 amends the definition of 'minority shareholder' to cover 'substantial' shareholders. The revised legislation is drafted in terms of individuals with a shareholding of 10 per cent or more.
Paragraphs 6 and 7 make minor consequential changes to sections 398 (1) (increase in amount or value of dividends where tax credit available) and 873 (orders and regulations) of ITTOIA.
Paragraph 8 makes minor consequential changes to other legislation.
