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HMRC have published Revenue and Customs Brief 76/09 about changes that have been made to the scope of the income tax credit for individuals in receipt of dividends from foreign companies.
The amendments take effect from 22 April 2009 for the current tax year and affect shareholders in:
- foreign companies with a holding that is 10% or more of the issued share capital of the company;
- foreign companies with a holding that is 10% or more of a specific class of share in the company;
- offshore funds.
The changes are summarised below, but full details are in the notes to the foreign pages of the self assessment return.
Two changes are being made to the tax treatment of distributions from offshore funds that are companies where an offshore fund is:
- Substantially invested (holds more than 60% of its assets) in interest bearing assets, individuals receiving distributions will be treated for tax purposes as having received interest and not a dividend or other type of distribution. This means that no tax credit will be available and the tax rates applying will be those applying to interest.
- Equity-based, individuals receiving distributions will be entitled to the dividend tax credit irrespective of the size of their holdings or the territory of origin of the fund.
The dividend tax credit is being extended to shareholders in foreign companies with a holding that is 10% or more of the issued share capital of the company, subject to conditions:
- the territory of the dividend-paying company must be a ‘qualifying territory’;
- the tax credit is not available where the distribution is one of a series of distributions made as part of a tax avoidance scheme, and any dividend-paying company is not resident in a qualifying territory;
- the company must not be an ‘excluded company’.
A qualifying territory is defined as the UK and any territory with which the UK has a double taxation treaty with a non-discrimination article. Current 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.
- Luxembourg – 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.
Since 6 April 2008, an individual with a shareholding of less than 10% of the issued share capital of a foreign company has been entitled to the tax credit, provided that the foreign company is not an offshore fund. Eligibility to the tax credit is not dependent on the source country of the dividend.
From 22 April 2009, a ‘minority shareholder’ is defined as a shareholder with less than 10% of a particular class of share in a company. A shareholder who no longer qualifies as a minority shareholder will still receive the tax credit if he can meet the qualifying territory test.
There is no change to foreign tax credit relief in respect of foreign withholding tax. An individual who is eligible to receive both foreign tax credit relief and the dividend tax credit will do so, subject to a ceiling equal to liability to UK income tax in respect of the dividend.
‘Excess credits’ are not repayable and cannot be offset against liability to income tax elsewhere.Where foreign tax credit relief is restricted under the terms of the double tax agreement with the UK, the amount allowable is calculated on the amount of the foreign dividend, not the amount of the dividend inclusive of the dividend tax credit.
