Corporate question

A year or two ago, my client company acquired about 12% of the shares in an overseas company. During the period of the recently completed accounts, it received a first dividend.

 

Withholding tax appears to have been deducted, but I would be grateful for advice on how this should be treated for tax purposes. Is it left out of account or is it subject to UK corporation tax at the normal rates, but with a credit for the tax paid abroad?

 

This also started me wondering what the reverse position would be. If shares in a UK company were held by a foreign company, what happens regarding dividends paid to an overseas shareholder?

 

Is the UK corporation tax paid treated as a 10% credit in the normal way or should withholding tax be deducted and paid over to HMRC? Are there any special vouchers, certificates or forms that need to be issued to the shareholder or HMRC and, if applicable, how is the withholding tax paid?

 

Query 17,765 – Dave

 

 

Assuming that the dividend from the overseas company was paid after 1 July 2009 and Dave’s client company is a small company, the dividend will be exempt from UK tax by virtue of the provisions of CTA 2009, Part 9A as inserted by FA 2009, Sch 14.

 

As there is no UK tax liability there is nothing against which to set the foreign withholding tax or indeed any underlying foreign tax on the profits out of which the dividend is paid. The foreign tax remains payable unless it is reduced or eliminated by a double tax treaty, but there is no credit available in the UK.

 

(Double tax relief has always been allowed on a source by source basis with the result that if the dividend is not taxable in the UK, the foreign tax, which cannot be offset against tax on any other income, remains a cost to the company.)

 

Dave does not mention which overseas territory is involved, but if there is a double tax treaty in place he should check to see whether the treaty sets a limit on withholding tax. If there is a reduction in the amount which can be withheld then the correct procedure is to seek a repayment from the overseas tax authority. In many cases the forms to enable you to do this can be downloaded from HMRC’s website.

 

Since Dave’s company does not control the overseas company there is no question of any adjustment to the UK company’s profit under the controlled foreign company regime.

 

In the reverse direction, the UK does not impose any withholding tax on dividends – the 10% notional tax credit is not repayable and so, essentially, the non-resident shareholder will suffer no further UK tax and will be taxed in his own territory on the net dividend received. The UK company paying the dividend does not need to account to HMRC for any tax nor are there any special forms that have to be completed – the procedure is exactly the same as for a distribution to a UK-resident shareholder.

 

 

The general principle under the old rules regarding the taxation of dividends received by corporate shareholders in the UK was that UK source dividends would be exempt from corporate tax while foreign source dividends were taxable.

 

A foreign tax credit could be obtained for any foreign tax paid (generally in the form of withholding tax) and if certain conditions were satisfied the credit could extend to include underlying tax paid by the foreign company (i.e. the tax paid on the company’s profits). 

 

The old rules were found to be potentially discriminatory under EU legislation and were subsequently amended by FA 2009. The result is that under CTA 2009, s 931A, corporation tax is payable on ‘any dividend or other distribution of a company’ though not if it is a ‘distribution of a capital nature’ or ‘an exempt distribution’.

 

The legislation then provides a number of exemptions to carve most dividends and distributions out of the tax charge, though the exemptions are themselves limited by various anti-avoidance provisions.

 

The result of the legislation is that most foreign dividends received by a UK company will be exempt from corporate tax. However, the process of considering the various exemptions and hurdling the anti-avoidance provisions must be undertaken before being able to say with certainty that a particular dividend will be exempt from UK corporate tax. 

 

Any withholding tax suffered on the foreign dividends received will not be deductible or creditable against liability to UK tax, on the assumption that there is no UK tax liability in respect of the dividend itself.

 

In terms of the reverse position where a UK company pays a dividend to a foreign company there is no withholding tax because the UK does not levy withholding tax on dividends paid to non-residents. The tax treatment of the dividend in the hands of the recipient foreign company is then obviously dependent on the tax regime in that particular jurisdiction.

 

A closer look ... taxation of dividends from foreign companies

• the paying company is a UK resident or resident in a ‘qualifying territory’ at the time the small company receives the distribution;
• the distribution is not interest treated as a distribution per CTA 2010, s 1000(1) para E or F;
• the receipt is a dividend in respect of which no tax deduction is given for the distribution outside the UK; and
• the distribution is not made as part of a tax advantage scheme.