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HMRC internal manual

International Manual

DT applications and claims - Types of income: Distributions


Dividends paid by a UK company are not allowable as a deduction when calculating the company’s liability to corporation tax on its profits. However, payments of interest, royalties, annuities etc are generally deductible as a charge on income. The result is that it is more favourable to a company if it can distribute its profits to shareholders by means of interest payments rather than as a dividend. ICTA88/S209 to S211 provides that certain payments of interest will be treated as distributions. They are therefore not deductible for the purposes of corporation tax.

It is normally the case that the interest article in a Double Taxation Agreement (DTA) specifically excludes payments treated as distributions. Treaties where relief is not available under the terms of the interest article will include the words “but does not include income dealt with in Article 10 of this Convention (or Agreement)” (or something similar) in the paragraph that defines what is meant by the word “interest”.

In such a case the dividend article of the DTA usually includes in the definition of the term “dividends” any item which is treated as a distribution under the laws of the country in which the payer of the income is resident. In these circumstances relief is only available under the dividend article. The amount of relief that is available under the dividend article is usually less than is available under the interest article and so less favourable to the claimant. See INTM343500.