UK tax exemption for foreign dividends

From 1 July 2009 foreign dividends received by a UK company are exempt from UK corporation tax.  Previously dividends received from non-UK companies had to be “grossed-up” and were subject to tax in the UK with a tax credit given for foreign tax suffered under appropriate double tax agreements.  The changes are very welcome and the main points are:

– “Small” companies are now included within the exemption whereas previously they were not. Conditions are that the foreign company paying the dividend must be resident in a jurisdiction which has a DTA with the UK which contains a non-discrimination clause. Also the dividend must not be paid as part of a “UK tax advantage scheme”.

– “Medium” and “Large” UK companies will also benefit from the exemption provided the foreign dividend falls into one of the following classes:

    – The paying company must be controlled by the UK recipient company;

    – The dividends paid are in respect of ordinary share capital which is not redeemable;

    –  The dividends are paid from profits available for distribution without a tax avoidance motive.

   There are other conditions as well outside the scope of this brief article but contact us for more details.

The introduction of the exemption means it is now very attractive for non-UK resident clients to set-up  UK holding companies to receive foreign dividends as non-resident clients will not be affected by UK tax avoidance motive tests.  It is also now attractive for a UK company to be used as an “offshore” private investment vehicle to receive non-UK source income for non-UK residents.  See also articles regarding capital gains exemptions for UK holding companies.