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HMRC internal manual

International Manual

Description of double taxation agreements: Dividends

CTA10/S1109 gives a company or a person resident in the United Kingdom receiving a distribution from a United Kingdom resident company an entitlement to a tax credit. TIOPA10/S6(2)(g) provides that double taxation agreements may give persons not resident in the United Kingdom the right to the tax credit under CTA10/S1109.

The dividend Article in many double taxation agreements entered into, or revised, since the introduction of the imputation system in FA72 incorporates a provision giving the resident of the other country the right to the tax credit. If the non-resident recipient of the distribution is a portfolio shareholder (see INTM164010 paragraph (f)) he may be entitled to payment of the tax credit less a percentage (normally 15 per cent) of the aggregate of the distribution and the tax credit.

From April 1999 the reduction in the value of the tax credit to one-ninth of the dividend has the effect that the amount of the tax credit payable to non-resident portfolio shareholders is zero.

If the recipient is a direct investor (see INTM164010 paragraph (g)) it may be entitled to payment of half the tax credit less a percentage (normally 5 per cent) of the aggregate of the distribution and the half tax credit. From April 1999 only companies resident in Belgium, Italy, Luxembourg, the Netherlands, Sweden, Switzerland or the USA and which control 10 per cent or more of the voting power in the United Kingdom company paying the dividend receive any payment of a partial tax credit. The amount is £0.25 in respect of a dividend of £90. It should be noted that the new US/UK DTC which came into effect on 1 April 2003 makes no provision for the payment of tax credits to any US shareholders. Tax credits ceased to be payable with effect from 1 May 2003.

The Board of Inland Revenue used to make arrangements with a company paying a dividend, whereby the company, when paying the dividend, also paid to the non-resident shareholder an additional amount equal to the excess of the tax credit to which the shareholder was entitled over their liability to Income Tax at the rate specified in the agreement on the aggregate of the dividend and the tax credit. All those arrangements were terminated with effect from 6 April 1999. Companies resident in the countries mentioned in the previous sub-paragraph now claim payment of partial tax credits from the Large Business Service Double Taxation Treaty Team, Barkley House, Nottingham.

INTM164040 onwards and INTM167360 onwards give information and guidance about dividends received by United Kingdom residents from foreign companies.

The Article contains a definition of dividends which includes income from shares, participation in profits and any item which under the laws of the country of which the payer of the dividend is a resident is treated as a distribution.

If the recipient of the dividend has a permanent establishment or fixed base in the other country and the dividend is `effectively connected’ with that permanent establishment or fixed base, then the provisions of the Article relating to payment of tax credits and withholding taxes do not apply and the dividend is treated as income of the permanent establishment or fixed base. A dividend would be `effectively connected’ with a permanent establishment if, for example, a branch of a foreign company bought shares in a United Kingdom company out of surplus funds of the branch. If the branch merely invested funds supplied by its head office, any dividend would not be `effectively connected’ with the permanent establishment.

The article may also contain an anti dividend-stripping provision.