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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 - groups taxed as a single entity overseas

In some countries the law may provide that one company may pay tax in respect of the aggregated profits of itself and others as if they were a single entity. As with pre-merger profits (see INTM164170) this consolidated basis of taxation could mean that there was no common identity between the company that paid tax on relevant profits and the company that paid a dividend to a UK recipient out of those profits.

In these circumstances the UK would not want to deny relief, and for dividends paid to the UK prior to 21 March 2000 the Underlying Tax Group evolved practices to deal with such groups. These were put on a statutory basis by FA00 for dividends paid to the UK on or after 21 March 2000.

For dividends paid to the UK on or after 21 March 2000 TIOPA10/S71 applies. These new provisions provide that for the purposes of calculating credit relief the relevant profits of these companies are regarded as a single aggregate figure in respect of a single company and the foreign tax paid by the responsible company as if it were paid by that single company.

The consolidation rules of some countries provide that under certain circumstances foreign companies may be brought into the consolidated group for tax purposes. The Section 71 provisions are framed so that only companies that are resident as a matter of fact in the country concerned may be included in the calculations of relevant profits and foreign tax for the deemed single entity.

By the same token, a dual resident company will be included in the calculation of underlying tax on the group as a single entity if it satisfies the criteria for inclusion. If a new company is brought into the consolidated group they may bring accumulated profits with them. If the new parent can access these accumulated profits and pay a dividend out of them, then they should be included in the aggregate figure of relevant profits for the consolidated group. The converse will apply when a company leaves the group.

It is possible that a consolidated group may have no relevant profits at all, but be subject to foreign tax. If a company within the group then pays a dividend to a UK company it is possible that it may be disadvantaged under the new rules. To ease the transition, underlying tax may be calculated using relevant profits for the individual companies in accordance with previous practice and information leaflets for dividends paid to the UK prior to 31 March 2001.

TIOPA10/S71 is largely derived from ICTA88/S803A. It was consistent with the basis for Controlled Foreign Companies (CFC) taxation by apportionment, which applies solely by reference to the CFC itself. ICTA88/S803A(1A) ensured that the single entity approach will not apply in respect of a dividend paid by a company if that company is a CFC claiming acceptable distribution policy (ADP) exemption (referred to as an ADP CFC). It applies to dividends paid on or after 16t h March 2005. Following the introduction of the dividend exemption rules it no longer applies for accounting periods of the CFC beginning on or after 1 July 2009, subject to certain transitional provisions, and was not rewritten into TIOPA10/S71.

CTIAA Underlying Tax Group at Nottingham is responsible for calculating the rate of underlying tax when a foreign company has been taxed as part of a single entity. Although the basic concept is simple, the exact system of taxation as a single entity varies from country to country, and complications arise when companies leave and join groups. Detailed guidance for business on various aspects as they arise has been published on the HMRC website.

See INTM164130 for information about dividend resolutions for groups taxed as a single entity overseas.