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HMRC internal manual

International Manual

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

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


Special provision is made for cases where a controlled foreign company pays a dividend specifically out of dividends received directly or indirectly from another controlled foreign company. In such circumstances the specified profits up to the amount of the dividend paid are excluded from the first company’s net chargeable profits. Both the dividend paid and the equivalent amount of specified profits are left out of account in determining when an acceptable distribution policy is pursued. The test is then applied by reference to the company’s other profits and the other dividends which it pays.


Controlled foreign company A has a 100% subsidiary B which is also a controlled foreign company. B has net chargeable profits of £100,000 and pays a dividend of £90,000 to A.

A has net chargeable profits as follows.

Dividend from B 90,000
Income from other sources 100,000

If A pays a dividend of £90,000 to United Kingdom residents specifically out of the dividend from B it enables B to satisfy the acceptable distribution test. If it pays a further dividend of £90,000 out of its total income exclusive of the dividend from B it will itself satisfy the test.

The purpose of this special provision is to enable A to specify the source of the first of its dividends without contravening the rule that dividends paid out of specified profits cannot be taken into account for the purposes of the acceptable distribution test. If, instead, A had to pay a dividend of £180,000 without specifying the profits out of which it was paid it would still itself pass the acceptable distribution test. However, B would have difficulty in doing so since A would apparently have paid the dividend out of its total net chargeable profits and the amount of the dividend from B which is reflected in the dividend of £180,000 would be

£180,000 x 90,000/190,000 = £85,263