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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Other tax rules on corporate finance: manufactured payments: manufactured overseas dividends: deduction of tax

This guidance applies to manufactured payments made before 1 January 2014, when the tax rules were simplified. For manufactured payments made on or after 1 January 2014, see CFM74430.

The deduction of tax regime for manufactured overseas dividends (MODs)

The tax deduction regime for MODs has three main aims.

  • First, to put the UK recipient in the same position (so far as possible) as if he received the real overseas dividend of which the MOD is representative;
  • Second, to ensure that a UK recipient of a MOD should not be able to claim DTR in circumstances where no overseas tax has been suffered.
  • Third, to prevent a UK recipient of a MOD or real overseas dividend claiming DTR in conduit arrangements where the benefit of the dividend is passed on by a corresponding manufactured payment.

These objectives are addressed by ITA07/S581 and S582, ITA07/S922-S925, CTA10/PT17/CH3 and SI1993/2004.

Deduction of tax applies only to overseas equities

Deduction of tax only applies to overseas equities. The basic rules requiring deduction are in ITA07/S922. This activates a withholding requirement on payers of MODs where the manufacturer is UK resident or, if not resident, carrying on a trade in the UK. This basic rule is disapplied in many cases by regulations in SI1993/2004.

ITA07/S581 and CTA10/S792 provide that where the MOD is received by a UK person after deduction of the tax, the recipient is treated as receiving an overseas dividend and the tax withheld is treated as overseas tax deducted. The amount of the overseas dividend is deemed to be the gross amount of the real overseas dividend, regardless of the amount of the MOD. If the MOD (plus UK withholding tax) is larger than the real dividend for whatever reason then CTA10/S797 or as the case may be ITA07/S583 treats the excess as a fee for undertaking the relevant transaction.

ITA07/S923 says that where a MOD is paid to a UK person (i.e. UK resident or non-resident receiving for purpose of UK branch trade) by a non-UK payer (i.e. a non-UK resident) or otherwise than in the course of a trade carried on the UK through a permanent establishment, then the UK recipient must deduct and account for a ‘reverse charge’. This is the amount of tax that a UK payer would have deducted and accounted for if it had paid the MOD to another UK recipient. The person might be the end owner of the securities, or an intermediary acting as principal or as agent. ITA07/S581 and CTA10/S794 will then apply to the recipient so that it is treated as receiving an overseas dividend under deduction of overseas tax. Again this basic approach is disapplied or modified in some cases by SI1993/2004.

ITA07/S925 provides the regulation-making powers that enable the basic approach outlined above to be modified in particular circumstances.