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HMRC internal manual

International Manual

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HM Revenue & Customs
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Controlled Foreign Companies: exemptions - Acceptable Distribution Policy ('ADP'): Attribution of dividends to accounting periods

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 2009ICTA88/SCH25/Para 2(1), (3) and (3A)

Whether a controlled foreign company pursues an acceptable distribution policy for an accounting period depends on what dividends may be attributed to that accounting period. When paying a dividend a controlled foreign company may do one or more of the following:

  • it may specify the profits out of which the dividend is paid (for example, a particular source of income)
  • it may specify the period for which the dividend is paid; or
  • it may specify neither the period nor the source of the dividend.

     

Specified profits

Where a controlled foreign company specifies the source from which a dividend is paid, whether or not the period for which it is paid is also specified, that dividend cannot be taken into account in determining whether the acceptable distribution test is satisfied. This restriction was designed, in part, to prevent a controlled foreign company from satisfying the test by paying a dividend specifically from the part of its profits which has borne relatively high foreign taxes, the credit relief on which would eliminate or greatly reduce the corporation tax charged on the dividend. The reference to ‘specified profits’ in the double taxation relief rules (ICTA88/S799) was repealed in FA00 (from 31 March 2001). The controlled foreign companies’ restriction, however, remains necessary to ensure that the special rules for acceptable distributions paid up through a holding company which is a controlled foreign company continue to work (see INTM254690).

Specified period

Where a controlled foreign company specifies the period for which a dividend is paid (without specifying the profits out of which it is paid) and the period is either an accounting period or falls wholly within an accounting period, then the dividend is treated as paid for that accounting period. If the period specified is not an accounting period and does not fall wholly within an accounting period, the dividend is allocated on a time basis to the accounting periods falling wholly or partly within the period specified by the controlled foreign company.

Neither profits nor period specified

Where neither the period for which, nor the profits from which, a dividend is paid are specified by the controlled foreign company, the rules in ICTA88/S799 are used to determine the period for which the dividend is paid. The dividend is regarded as paid for the periods the profits of which are ‘relevant profits’ in relation to the dividend for the purposes of ICTA88/S799. Under ICTA88/S799(3)(c) a dividend paid neither for a specified period nor out of specified profits is treated as paid for the last period for which the company’s accounts are made up ending before the date on which the dividend became payable.

Where the dividend exceeds the ‘relevant profits’ (see INTM254670) of that period, the excess is treated as paid for the immediately preceding period and so on backwards through time until the dividend is absorbed. Where periods for which accounts are made up do not coincide with accounting periods, the ‘relevant profits’ of those periods of account and the dividends representing those profits are allocated to the accounting periods on a time basis. This enables the necessary comparison to be made between the dividends and the distribution standard for each accounting period.

The rules for time apportionment are found in ICTA88/SCH25/PARA2(3A). Where a dividend is paid for a period which is not an accounting period but falls within two or more accounting periods it is treated as if it were a number of separate dividends. Each of these is arrived at through a time apportionment and is treated as paid separately for each separate accounting period falling within the overall period for which the dividend is paid.

Example 1

A controlled foreign company draws up accounts showing the following profits available for distribution.

Year ended 30 September year 1 £ 70,000
   
15 months ended 31 December year 2 £125,000

It declares a dividend of £150,000 payable on 1 April year 3 but does not specify the profits from which, or period for which, it is paid. The accounting periods for which the dividend is paid and the amount of the total dividend finally allocated to each period after treating the excess as paid for the immediately preceding period, are as follows.

  Profits Dividend
     
Year ended 30 September year 1 £ 70,000 £ 25,000
Year ended 30 September year 2 £100,000 £100,000
3 months ended 31 December year 2 £ 25,000 £ 25,000

Example 2

The facts are as in Example 1 except that the dividend is £100,000. In accordance with ICTA88/S799(3) and (4), the dividend is regarded as paid out of the profits for the fifteen months ended 31 December year 2. The profits of that period and the dividend are then allocated on a time basis to the accounting periods comprised in that period. The allocation of the dividend to accounting periods is as follows.

  Profits Dividend
     
Year ended 30 September year 1 £ 70,000 £NIL
Year ended 30 September year 2 £100,000 £80,000
3 months ended 31 December year 2 £ 25,000 £20,000

If the attribution of dividends results in no dividends being attributed to a particular accounting period (as in example 2 above), then it will not be possible for the acceptable distribution test to be satisfied for that period unless dividends are available from preceding periods (see INTM254660 to INTM254690).