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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - Acceptable Distribution Policy ('ADP'): Treatment of foreign taxes

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

Dividends from a controlled foreign company passing to a United Kingdom resident through one or more non-resident companies may well suffer overseas tax, whether by assessment or deduction, between the controlled foreign company payer and the UK resident recipient. If so the foreign tax will be taken into account in determining the extent to which dividends reaching the recipient ‘represent’ the profits of the controlled foreign company.

The gross amount of a dividend should be taken into account for the purposes of the acceptable distribution test. That is the amount before deduction of any tax withheld on payment of the dividend to the UK recipient. For this purpose withholding tax is tax charged on payment of a dividend which would not have been charged if the dividend had not been paid.

Care should be taken to distinguish withholding tax from tax chargeable on the profits out of which the dividend has been paid. Dividends paid from certain countries are often shown as having tax ‘deducted’ when in fact the tax was charged on the underlying profits.