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HMRC internal manual

International Manual

UK residents with foreign income or gains: dividends: Underlying tax: reserves

TIOPA10/S59 (8) provides that ‘relevant profits’ or ‘profits available for distribution’ are the company’s accounts’ profits making no provision for reserves, bad debts or contingencies other than such as is required to be made under the foreign country’s law.

In practice, transfers to reserves for a future liability are allowed if they represent a proper deduction in computing commercial profits and there is a firm expectation that the liability will be incurred and they are directly related to the expected amount of the liability. Provisions which represent an appropriation of profit or which are made not on grounds of commercial necessity but for reasons of commercial prudence are regarded as available for distribution and included in relevant profits.

CTIAA Underlying Tax Group has considered a number of reserves commonly found in particular countries. Their proper treatment is shown in the Group’s information leaflets, which are sent to companies when considering a dividend.