Dividends are income

In September 2003 the appellant a UK resident private investment company and wholly-owned subsidiary of the Nationwide Building Society entered into a stock loan agreement with AB a bank in the Netherlands acting through a London branch.

Under the agreement AB transferred shares in BC a Cayman Islands resident company to the appellant who had to transfer them back after a period.

During its period of ownership of the shares the appellant agreed to pay manufactured dividends to AB in respect of any dividend paid on the shares during the loan. The appellant also agreed to pay a fee of £325 000 to AB.

On the same date the appellant and BC entered into a subscription agreement whereby the appellant would buy an identical amount of preference shares in BC.

In September 2004 the appellant sold the first...