Other tax rules on corporate finance: manufactured payments: manufactured overseas dividends: MODs from overseas debt securities
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 debt security
A manufactured overseas dividend in respect of interest on an overseas debt security is treated as interest payable on a loan relationship to which the company is party. CTA09/PT6/CH9 (not CTA10/S791) applies to such payments and ensures debits are brought into account in accordance with the loan relationship rules as if the company had paid real interest. The payment will be treated as a trading loan relationship expense if paid for the purposes of its trade and a non-trading loan relationship debit otherwise.
The treatment of payments made in the course of repos is explained at CFM46200.
Deductibility of the payment will depend on the whether the payment is a legitimate business expense incurred for the purposes of the individual’s trade, profession or vocation. If the payment is not deductible as an expense of a trade, profession or vocation, it is deemed by regulation 2B (3) of SI1993/2004 to be an annual payment (although no tax needs to be deducted). Relief will not then be available because of ITTOIA05/S727 and S728.
Manufactured overseas dividends representative of interest received as an integral part of a trade will be taken into account in computing the profits of that trade on normal principles. In other cases they will be brought into account as non-trading loan relationship credits. Double taxation relief for any tax suffered on the manufactured overseas dividend is available subject to the normal rules (and the MOD regulations where they apply). Where securities are out on repo or stock loan then CTA10/S108-S110 may be in point. See INTM167210. In these circumstances, the claimant will need to be able to demonstrate that overseas tax was suffered on the real overseas dividend.
The treatment of receipts received by companies in the course of repos is explained at CFM46380.
A manufactured overseas dividend in respect of overseas debt securities received by a person chargeable to income tax will be taxable under ITTOIA05/S5 if received in the ordinary course of a trade. Double tax relief will be available subject to the normal rules (and MOD regulations).
Where the receipt is not in the normal course of a trade the recipient is treated under Regulation 2B(4) as receiving a receipt of an amount equal to the cash payment actually received and which is taxable under ITTOIA05/S369, but is not entitled to claim any double taxation relief in respect of any tax attributable to the receipt.