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HMRC internal manual

International Manual

HM Revenue & Customs
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UK residents with foreign income or gains: dividends: Underlying tax

TIOPA10/S67 imposes a limitation, in cases involving an avoidance scheme (as defined by TIOPA10/S68), on the relief for underlying tax (INTM164010 paragraph (d)) which a UK company may claim when it receives a dividend from an overseas company. The legislation counters schemes entered into by some UK based groups under which they acquired for a specified period a stream of highly taxed foreign income (such as dividends paid by a previously unconnected company out of its highly taxed profits).

Where the Section applies, relief for the bought in tax is limited by reference to the rate of Corporation Tax payable by the UK company on the dividend which it receives. This means that the effect of the legislation is to leave the company with the same Corporation Tax liability as it would have had if the scheme had not been entered into and the highly taxed income had not been acquired. The legislation may apply to dividends paid to a UK company on or after 26 November 1996.

Responsibility for operating the limitation will fall on the Underlying Tax Group, Yorke House, Nottingham. But specialists at Business International, Outward Investment team can assist in identifying avoidance schemes where a limitation of relief should be made.

Where it appears that a group company, resident or not, has sold or lent to an overseas company, outside the group, a minority interest in a highly taxed overseas company a brief note of the facts should be sent to CTIAA Business International, Outward Investment team.

Where it appears that a non-resident group company has acquired, from outside the group, a minority interest in a highly taxed overseas company or has participated in a highly taxed partnership, details of the acquisition should be provided to the Underlying Tax Group. In addition this information should be provided to them when making a request for an underlying tax rate in respect of a foreign dividend received by a UK company from a non-resident group company (INTM164440).

The following sub-paragraphs indicate how TIOPA10/S67 will be applied in particular circumstances. (TIOPA10/S68 gives the meaning of “avoidance scheme” for the purposes of Section 67.)

Where the condition in Section 68(4) is met we would not regard a company acquired `off the shelf’ as not having been under the control of the UK company at any time by reason only of the fact that it was owned by a company formation agent throughout the period between its incorporation and its acquisition by the UK company. Also, generally speaking, we accept that a company is not caught if there was a time before the doing of anything as part of, or in pursuance of, the avoidance scheme when it was under the control of the UK company. However, we will not necessarily be bound to adopt that approach in a case involving a company that was under the control of the UK company in the past, which then ceased to be so and in which an interest is subsequently acquired as part of, or in pursuance of, an avoidance scheme. Refer any such cases to CTIAA Business International, Outward Investment Team.

The simple introduction of new `mixer’ company into an existing group would not of itself trigger the legislation assuming that it does not form part of an avoidance scheme within Section 68. Equally, the new rules will not apply in cases where the acquisition of an interest in a highly-taxed company is not, or is not part of, a scheme or arrangement having as its purpose, or as one of its main purposes, the obtaining of relief for underlying tax, even though the interest may, at the time of acquisition or later as a result of an intra-group reorganisation, be held through a `mixer’ company.

For the treatment of dividends from mixer companies paid to the UK on or after 31 March 2001 see INTM164220 et seq.

Of course, each case must be examined by reference to its own particular facts. We may also have to reassess the position if new schemes come to light which are designed to circumvent Sections 67 or 68, especially if they seek to take advantage of the practice set out above. Refer any such cases to CTIAA Business International, Outward Investment team.

An enquiry from a company or from its advisers about whether, in a particular case, a bona fide commercial acquisition might lead to a restriction of relief under Section 67 should be referred to CTIAA Business International, Outward Investment team. The enquiry must identify all the parties concerned, the full details and the purposes of the transactions that are the subject of the enquiry and the reasons why it might be thought that Section 67 will apply.