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HMRC internal manual

International Manual

From
HM Revenue & Customs
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Controlled Foreign Companies: exemptions - Acceptable Distribution Policy ('ADP'): Dividends already taken into account and excluded dividends

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/PARA2A(4) and (8)

There are two situations where a dividend cannot be taken into account in satisfying an acceptable distribution for a later period:

  • where it has already been taken into account in satisfying the acceptable distribution policy for an earlier period, and
  • where it is an ‘excluded dividend’.

A dividend paid for an earlier accounting period cannot be used to satisfy an acceptable distribution policy for the current period to the extent that it has already been taken into account in showing that the company pursued an acceptable distribution policy for an earlier period. A dividend is taken into account for an earlier period where, but for that dividend, apportionment would have been due.

A company cannot include dividends for an earlier period in meeting a shortfall for the current period where that earlier period is an ‘excluded period’. An ‘excluded period’ is an accounting period in respect of which an apportionment is due. An ‘excluded dividend’ is a dividend which is paid in whole or in part out of the profits from which the chargeable profits for an ‘excluded period’ are derived. Tax which has been paid on an apportionment of chargeable profits is available for relief as double tax relief against dividends paid out of the total profits from which those chargeable profits are derived (INTM256230 to INTM256320). In consequence tax credit relief will already be due against dividends paid for an apportionment period and these should not be therefore be taken into account in any other way.

Example

A non-trading company which is a controlled foreign company in all periods has the following net chargeable and relevant profits:

  Net Chargeable Relevant
     
Year 1 £75,000 £90,000
Year 2 £60,000 £40,000
Year 3 £65,000 £47,000

Year 1. The company satisfies an acceptable distribution policy by paying a dividend of £70,000 to the United Kingdom within 18 months of the year end. This is £2,500 in excess of the required dividend of £67,500 (£75,000 x 90%).

Year 2. An apportionment is due of £60,000.

Year 3. The company satisfies an acceptable distribution policy as follows. The dividend required is £58,500 (£65,000 x 90%) and this is met by payments of £47,000 from the relevant profits for year 3 and £11,500 from those of year 1. This arises as follows.

  • The whole of the year 3 relevant profits of £47,000 are paid to the United Kingdom within 18 months of the year end thus satisfying the distribution condition.
  • Year 2 is an excluded period and dividends paid out of the relevant profits for this year are not available to satisfy an acceptable distribution policy for a later year because they are excluded dividends.
  • The £2,500 excess over the 90% net chargeable profits paid for year 1 is available towards meeting the distribution condition of year 3 since the year 1 dividend was clearly paid before 18 months of the end of year 3.
  • Of the £20,000 relevant profit unpaid for year 1 an additional dividend of £9,000 is now paid within 18 months of the year 3 year end. The balance of £11,000 remaining unpaid is available for later periods.