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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Other tax rules on corporate finance: manufactured payments: manufactured overseas dividends: MODs from overseas equities

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.

Tax treatment of a MOD on an overseas equity

Companies: payments

Where a manufactured overseas dividend is payable in the course of a trade carried on by the UK manufacturer, then it will be treated as a trading expense. This position was formalised by paragraph 4(1A) of Schedule 23A (now CTA10/S791(3)) for accounting periods starting on or after 1 April 2004, but in practice most financial traders are likely to have submitted, and to have had accepted, computations based on this approach prior to the change.

Where a company has investment business to which the payment relates, then for accounting periods starting on or after 1 April 2004 it is treated for the purposes of CTA09/PT16/CH2 as management expenses (CTA10/S791(4)). Prior to this relief for a MOD on equities was normally available either as a management expense or charge, provided the payment could properly be characterised as such an amount.

For accounting periods starting on or after 1 April 2004, relief for payment of a MOD cannot be given unless the payment relates to the company’s trade or investment business.

The treatment of MODs paid in the course of repos is explained at CFM46260.

Individuals: payments

Deductibility will depend on the whether the payment is legitimate business expense in connection with the individual’s trade, profession or vocation. No relief for the payment will be available if it is not deductible on ordinary trading income principles (ITTOIA05/PT2).

Companies and individuals: receipts

The payment will normally be treated as a trading receipt (taxed under CTA09/PT3 or ITTOIA05/PT2 for income tax payers) equal to the gross amount of the real overseas dividend if received in the course of a trade carried on the recipient. Otherwise it will be charged as a dividend from a non-UK company for income tax payers (ITTOIA05/S402) or corporation tax payers will be taxable or exempt in accordance with CTA09/PT9A from 1 July 2009 onwards.

MODs received by income tax payers in 2008/09 and subsequent years of assessment carry an entitlement to a tax credit under ITTOIA05/S397B. See the Savings and Investment Income Manual SAIM5104.

The treatment of MODs received by companies in the course of repos is explained at CFM46380 and CFM46390.