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HMRC internal manual

International Manual

DT applications and claims - Types of income: Distributions

Special relationship

ICTA88/S209(2)(da) provides that a payment is a distribution when it is

  • paid out of assets of the company
  • in respect of securities issued by the UK company
  • paid to a company where the paying company is a 75% subsidiary of the company to which payment is being made
  • or both are 75% subsidiaries of a third company

And goes on to state that either the whole or any part of the distribution would not have been paid if the companies did not have that arrangement between themselves.

The effect of this legislation is that double taxation relief is only available to the non-resident company that has made the treaty claim by reference to the dividend article of the relevant Double Taxation Agreement (DTA) except for any amount that represents a “reasonable commercial return” on the investment ICTA1988/S209(2)(d).

There are questions in Part 3 of form 4450/1FD to help you identify such cases. In any case where the Inspector tells you that any part of the distribution should be reclassified as a dividend you will need to check what the relevant DTA says about such payments.

If the paragraph in the article of the DTA that defines interest payments includes the words “but does not include income dealt with in Article 10 of this Convention (or Agreement)” you should not allow relief under the terms of the interest article for that part of the distribution that is treated as a dividend. Instead you should consider if any relief is due by reference to the dividend article of the DTA see INTM343500.

Cases of doubt or difficulty should be referred to Technical Advice Group.