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HMRC internal manual

International Manual

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


It is fundamental to the acceptable distribution test that only the dividends of a controlled foreign company which are paid directly or indirectly to United Kingdom residents should be taken into account. It is not sufficient for payment to be made to an intermediate non-resident company unless the latter pays to United Kingdom residents a dividend representing the dividend received from the controlled foreign company. Expenditure in the intermediate non-resident company can reduce its relevant profits. Where a controlled foreign company pays dividends indirectly to the United Kingdom it must ensure that the amount of that dividend will still represent at least 90% of its profits after reduction by the intermediary’s expenses on route to the United Kingdom

Where a controlled foreign company pays a dividend indirectly to United Kingdom residents, identification rules are necessary to trace the dividend through the hands of any intermediate company. The straightforward case is where a dividend (‘the initial dividend’) is paid by a controlled foreign company to another overseas company which in turn pays a dividend (‘the subsequent dividend’) to a United Kingdom resident. So long as the subsequent dividend is paid out of profits derived in whole or in part from the initial dividend, so much of the initial dividend as is represented by the subsequent dividend is regarded as paid to the United Kingdom resident. What profits a particular dividend has been paid out of is essentially a question of fact to which the law of the country of the payer may be relevant.

Example 1

United Kingdom resident company A is the parent of a controlled foreign company C which it holds through a wholly-owned non-resident holding company B. C has net chargeable profits of £100,000 for its accounting period to 31 December year 1. On 30 June year 2, C pays a dividend of £90,000 to B. B has other income for its accounting period to 31 December year 2 of £50,000 and on 28 February year 3 pays a dividend of £135,000 to A.

What has to be established is what part of the dividend paid by C to B can be regarded as paid to A. If the dividend resolution of B merely states that its dividend is paid for the accounting period to 31 December year 2, and neither the facts nor the local law to which B is subject imply any different treatment, then the part of B’s dividend to A which represents the dividend from C to B is arrived at by apportionment as follows.

Dividend from C to B  
-–-–-–-–-–-–-–-–-— x dividend from B to A
Total profits of B  


-–-–-—- x £135,000 = £86,786

C is therefore regarded as paying a dividend of £86,786 to A for its accounting period to 31 December year 1, and as this is less than 90% of its chargeable profits C does not pursue an acceptable distribution policy for that period.

The position is different if the intermediate company specifies that its dividend to the United Kingdom resident company is paid primarily out of the dividend it received from its own subsidiary.

Example 2

The facts are as in Example 1 but if B specifies that its dividend to A is paid primarily out of its dividend from C then it is conclusively established that the whole of C’s dividend to B is regarded as paid to A. C passes the acceptable distribution policy test because 90% of its net chargeable profits have been paid as dividend to a United Kingdom resident.

If B is a controlled foreign company any part of the dividend from C which it specifically pays to A is excluded from its own net chargeable profits for the purposes of establishing whether it has pursued an acceptable distribution policy (see INTM254650).

The principles set out above apply equally where two or more non-resident companies are interposed between a controlled foreign company and a United Kingdom resident, provided that the interposed companies are ‘related’ to each other. For this purpose, one company is related to another if the other

  • controls directly or indirectly, or
  • is a subsidiary of a company which controls directly or indirectly

at least 10% of the voting power in the first company.

If company A is related to company B which is related to company C then A is related to C and so on.

To meet the ADP test, dividends must not only be paid to a United Kingdom resident, but also be taxable in their hands. Indirect dividends that otherwise satisfy the rules for indirect dividends, are deemed to satisfy this second requirement (FA01/S82(4)).