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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - Acceptable Distribution Policy ('ADP'): The ADP exemption

The ADP exemption was abolished in FA09 for accounting periods of CFCs beginning on or after 1 July 2009. This guidance only applies to APs ending on or before 30 June 2009

ICTA88/S748(1)(a) and (2) No apportionment is required for any accounting period in which a controlled foreign company pursues an acceptable distribution policy (‘ADP’). Broadly, a controlled foreign company pursues an acceptable distribution policy for an accounting period if within eighteen months of the end of the period it pays dividends representing at least 90% of its ‘net chargeable profits’ directly or indirectly to UK residents. Special rules apply where a company intends to pursue an acceptable distribution policy but has not yet done so at the point within the 18 month period when it completes its tax return. Details can be found at INTM256650. There are also special rules in regulations for insurance companies accounting on a funded basis which wish to pursue an acceptable distribution policy (INTM256740). In addition, dividends paid to the UK cannot satisfy an acceptable distribution policy to the extent that they are paid out of distributions received by the controlled foreign company from the UK, which would have been exempt from tax if the controlled foreign company had been UK resident.

Dividends paid to UK resident companies must be taken into account in their corporation tax computations if they are to be included in dividends satisfying the test. Dividend payments that are involved in a UK tax avoidance scheme are excluded from the test if paid on or after 7 March 2001(see INTM254770).

Guidance on the main elements of the ADP test itself can be found as follows.

  • Attribution of dividends to accounting periods - INTM254620.
  • Time limit for payment of dividends - INTM254630.
  • Distribution standard - INTM254640.
  • Meaning of ‘net chargeable profits’ - INTM254650 
  • Dividends payable from preceding periods - INTM254660 
  • Abatement of distribution standard in certain cases where there are non-resident shareholders - INTM254700.
  • Dividends paid indirectly to the United Kingdom, for example, through an intermediate holding company - INTM254710 to INTM254730.
  • Dividends paid out of distributions from a United Kingdom resident company - INTM254760.