SAIM5102 - Dividends and other company distributions: tax credits on foreign distributions

Tax credits: foreign distributions

As a result of changes made in the 2008 and 2009 Finance Acts, tax credits also attach to most ‘relevant distributions’ from companies non-resident in the United Kingdom which are made either to residents of the United Kingdom or to certain non-UK resident persons. The legislation on tax credits for foreign dividends is set out in ITTOIA05/S397A to S397C.

From 6 April 2008, for the tax year 08/09 a tax credit is available for a relevant distribution if the shareholding in the foreign company is less than 10% of the company’s issued share capital and the company is not an offshore fund. Under this legislation most individuals with shareholdings in foreign companies are eligible for tax credits.

From 22 April 2009, and for subsequent tax years, a tax credit is available for a relevant distribution if one of the following conditions is met:-

  • The company is an equity-based offshore fund. (If the offshore fund holds more than 60 % of its assets in interest bearing or economically similar form, any distribution is taxed as a payment of interest and the tax credit is not available.) or
  • The company is not an offshore fund and the shareholding is less than 10% of the issued share capital of the company or of any class of its shares. or
  • The company is not an offshore fund, is resident in a ‘qualifying territory’ and is not an ‘excluded company’.

A ‘qualifying territory’ is a territory with which the UK has a double tax treaty with a non-discrimination article. There is a list of ‘qualifying territories’ at INTM432112.

An ‘excluded company’ is a company resident in a qualifying territory but excluded from any or all of the benefits of the double tax treaty (see list below). If the distribution is one of a series paid as part of a tax advantage scheme, as defined in ITTOIA/S397AA (5), each company in the series must be resident in a qualifying territory. A tax advantage scheme is an avoidance scheme having as its sole purpose the securing of the tax credit or any tax relief in relation to a company distribution.

The ‘excluded companies’ are:


Barbados

Companies established under the International Business Companies Act(s)

Cyprus

Companies entitled to any special tax benefits under various Cyprus enactments

Jamaica

Companies established under enactments relating to International Business Companies and International Finance Companies

Luxemburg

Holding companies established under the Luxembourg 1929 and 1937 Acts

Malaysia

companies carrying on offshore business activity under the Labuan Offshore Business Activity Act 1990

Malta

Companies entitled to special tax benefits under various enactments