UK residents with foreign income or gains: dividends: Dividends received by UK companies on or after 31 March 2001: ADP dividends
This section repealed by FA 2009 s 36, Sch 16 para 2 in relation to accounting periods of controlled foreign companies beginning on or after 1 July 2009.
Non-resident companies controlled by UK persons are exempt from the CFC rules if they pursue an acceptable distribution policy (‘ADP’). This means they must pay at least 90% of their net chargeable profits as a dividend (‘an ADP dividend’) to the UK. For dividends paid into the UK before 31 March 2001 no distinction was made between ordinary dividends and those paid to satisfy an acceptable distribution policy for a Controlled Foreign Company (an ‘ADP dividend’). If the latter was paid through an intermediate holding company before being brought into the UK it could be freely mixed with high taxed dividends to reduce UK tax liability.
FA00 changed this by bringing in ICTA88/S801C for dividends paid to the UK on or after 31 March 2001. This is deemed to have had effect at the time each component dividend was paid, so that however long ago the ADP dividend was paid, S801C applies if the eventual Case V dividend coming into the UK is paid on or after 31 March 2001.
Section 801C prevents ADP dividends being mixed with other income of the intermediate company by treating any dividend paid on by that company as if it were two or more dividends, each paid by a separate company. The only foreign tax that can be set against UK tax payable on each ADP dividend is the foreign tax actually payable in respect of that dividend.
S801C applies where the only reason the company is exempt from the CFC rules is because it has pursued an acceptable distribution policy. It does not apply, for example, to a dividend paid by a non-resident company that is exempt from the CFC rules because it passes the exempt activity test.
S801C uses four definitions of dividend:
- an ‘initial dividend’ which is an ADP dividend paid by a CFC;
- an ‘intermediate dividend’ which is one paid by an intermediate company that to some extent represents one or more initial dividends;
- a ‘subsequent dividend’ which is one paid by the top non-resident company in the chain to a UK resident and which to some extent represents one or more initial dividends;
- a ‘residual dividend’ which represents the remainder of an intermediate or subsequent dividend after taking out all the initial dividends.
The relevant profits and underlying tax are attributed accordingly. Where the intermediate company is not itself a CFC, the ‘residual dividend’ is treated as a ‘qualifying foreign dividend’ and, as such, can be pooled for the purposes of utilising EUFT.
An example is given at INTM164290.
Controlled Foreign Companies that were previously content to pay an ADP dividend may now claim that they are exempt under one of the other tests, for example the motive or exempt activity test. Such claims should be examined in line with existing guidelines. There are no provisions to take special account of double taxation relief considerations.