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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - Acceptable Distribution Policy ('ADP'): Dividends from preceding 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 2009

ICTA88/SCH25/Para 2A(1) to (4)

On occasions 90% of the net chargeable profits of the accounting period may exceed the relevant profits (INTM254670) for the year. This may happen for a variety of reasons. Accounting provisions may be disallowed for tax purposes, interest received in the year may exceed interest receivable or transactions with the controlled foreign company may not be at arm’s length. In this case the company may draw on the profits of the preceding and earlier accounting periods to meet any shortfall in satisfying the 90% distribution standard. However, it will not be possible to do this with dividends defined as ‘excluded dividends’ (see INTM254680).

A company can only satisfy the acceptable distribution standard of a current period by including dividends paid for an earlier period where those dividends have not already been used to satisfy an acceptable distribution policy (INTM254680) and the ‘distribution condition’ for the current period is met. The distribution condition is met where

  • all relevant profits for the current period have been paid as dividends (other than out of specified profits) to persons resident in the United Kingdom. Where there are non-resident shareholders in the controlled foreign company only the appropriate portion of the relevant profits (INTM254700) needs to have been paid to the UK, and
  • those dividends must have been paid no later than 18 months (or at any such later time as the Commissioners of Revenue & Customs may allow or the insurance regulations provide for) after the year end of the accounting period of the controlled foreign company for which the acceptable distribution policy is being pursued. (But where the computation of net chargeable profits is amended a longer period may be allowed - see INTM254630).

Where the distribution condition is satisfied the company may turn to the relevant profits of the preceding accounting period to meet any shortfall for the current year. Where there are chargeable profits but no relevant profits for the current year the distribution condition is automatically satisfied for that year. Where the distribution condition is satisfied for the preceding period the company may turn to the period preceding that and so forth.

ICTA88/SCH25/Para 2A(4A) to (4C)

An avoidance scheme was disclosed describing how a company could potentially meet the distribution condition in circumstances whereby income accrued in such a way that it would not be included in relevant profits. This could include for example income accrued in a partnership of which the Controlled Foreign Company was a partner or to the trustees of a trust for which the company was a settlor or beneficiary. Sub-paragraphs 2A(4A) to (4C) were introduced to ensure that where the distribution condition would not be met if such income were included in relevant profits then the recourse to relevant profits of earlier accounting periods will not be open to the company. These provisions ensure that a distribution must be paid primarily from diverted income within the avoidance schemes. Sub-paragraphs 4A to 4C are effective for accounting periods of the Controlled Foreign Company which begin on or after 12 March 2008. Where an accounting period straddles that date, then the period before and the period on or after that date are treated as separate accounting periods for this purpose.