INTM164020 - UK residents with foreign income or gains: dividends

Dividend articles in double taxation agreements

The wording of the dividend Articles in the United Kingdom's double taxation agreements can be divided broadly into two types.

a) The country of which the company paying the dividend is a resident is not entitled to impose any tax on the shareholder who is a resident of the other country which is additional to the tax charged on the profits of the company. Agreements of this type are mainly those with former colonies of the United Kingdom which continue to have the `classical' system of taxation of company profits and dividends, that is the system which was in force in the United Kingdom before FA 1965. Tax may appear to have been deducted from the dividend but such tax is normally company tax deducted (see INTM164010 paragraph (e)).

b) The country of which the company paying the dividend is a resident is entitled to impose a tax on the shareholder who is a resident of the other country. The rates of tax are specified in the dividend Article and there are normally different rates depending on whether the recipient is an individual or a company controlling directly or indirectly less than a specified percentage of the voting power in the company paying the dividend, or a company controlling more than a specified percentage of the voting power in the foreign company. Such tax is a direct tax (see INTM164010 paragraph (c)) and is usually described as a withholding tax. The rates in each agreement are given in DT2100 onwards.

In some agreements the dividend Article requires that the recipient is subject to tax (see INTM162020) on the dividend in the country of which he is a resident before the rate of tax laid down in the agreement is applied. If he is not subject to tax then the country of which the company paying the dividend is a resident may charge the dividend in accordance with its own domestic law.

Many countries with which the United Kingdom has no double taxation agreement impose a tax on dividends paid to non-resident shareholders. Such taxes are normally direct taxes (see INTM164010 paragraph (c)). If there is any doubt as to whether such a tax is a direct tax refer to Central Policy, Tax Treaty Team, FAO Technical Specialist.

Many agreements also provide for relief for underlying tax attributable to dividends (see INTM164100).

The credit Articles in double taxation agreements with Guernsey, Jersey and the Isle of Man specifically prohibit any tax credit relief for tax deducted from dividends paid by companies resident in those territories.