SAIM5104 - Dividends and other company distributions: tax credits on foreign distributions: what are ‘relevant distributions’
Tax Credits: foreign distributions
Most distributions of non-UK resident companies are ‘relevant distributions’. ‘Relevant distributions’ comprise:
- Distributions analogous to qualifying distributions made by a UK resident company, which arise in the tax year 2008-09 or subsequently.
- Cash dividends paid over under an approved share incentive plan under ITEPA03/SCH2P68(4).
- Dividend payments treated under ITTOIA05/S407 as paid when dividend shares cease to be subject to an approved share incentive plan.
UK residents and eligible non-UK residents are entitled to a tax credit equal to one ninth of the amount or value of the distribution increased by the amount of any withholding tax or special withholding tax chargeable (‘the grossed up distribution’). Eligible non-UK residents are those who meet the condition in ITA07/S56 (3) (Residence etc of claimants.).
The person may claim to deduct the tax credit from the income tax charged on the person’s total income for the tax year in which the distribution is brought into charge to tax. However, because of the requirement that the distribution must arise in the tax year 2008-09, or subsequently, a person taxed on the remittance basis will not get a tax credit for earlier year dividends remitted to the UK on or after 6 April 2008.
As with tax credits on UK qualifying distributions (SAIM5100):
- ITTOIA05/S397A(3) treats the tax credits as reduced if those distributions are not brought into charge to tax, and a person may be entitled to a tax credit whose value is nil;
- ITTOIA05/S397A (5) makes it clear that if a person other than the recipient of the distribution is treated as receiving the distribution, that person is entitled to the tax credit;
- there are special rules that deny tax credits in the case of stock lending or repos), certain types of unit trust, and Lloyd’s premium trust fund assets;
- ITTOIA05/S398 treats the amount of the dividend or distribution as increased by the amount of the tax credit, but not if the recipient of the distribution is a dealer.
Under ITTOIA05/S397B, ‘relevant distributions’ carrying an entitlement to tax credits under s397A include manufactured overseas dividends (MODs), but only if the MOD is representative of a distribution made by a non-resident company. MODs that are representative of interest paid by a non-resident company do not carry an entitlement to tax credits under s397A. More information on MODs can be found at CFM74360 onwards.