INTM164090 - UK residents with foreign income or gains: dividends

Dividend stripping

Double taxation agreements negotiated since the passing of Finance Act 1972, together with a number of existing agreements which have subsequently been amended by a Protocol, often include provisions for conferring on certain persons resident in the other country the right to a tax credit in respect of dividends from United Kingdom companies. To prevent excessive tax credits being obtained through dividend-stripping operations, such agreements usually contain a provision restricting or denying credit where a dividend is paid out of pre-acquisition profits.

The precise circumstances in which a restriction will operate depends upon the terms of the agreement, for example, Article 11(5) of the agreement with the Irish Republic (SI76 No 2151). The restriction will normally be applied by Underlying Tax Group, Nottingham who are responsible for authorising payment of tax credits in respect of United Kingdom dividends. Any case where it appears that the restriction may be appropriate should be drawn to their attention.