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HMRC internal manual

International Manual

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Distribution exemption: Exemption for all other companies: shares accounted for as liabilities

CTA09/S931I: dividends in respect of shares accounted for as liabilities

If a share is accounted for as a liability it may be treated for tax purposes as a loan relationship, in accordance with Chapter 6A of CTA09/Part 5. If it does not fall to be treated as a loan relationship, any dividend paid in respect of the share and not otherwise taxable will fall to be taxed or exempt in accordance with CTA09/Part 9A.

The effect of CTA09/S521C(1)(f) is that a share can only be treated as a loan relationship if it is held for an unallowable purpose, as defined in CTA09/S521E. If it is held for an unallowable purpose, it must also meet other conditions.

If a share is not treated as a loan relationship solely because it is not held for an unallowable purpose, then a dividend paid in respect of that share can fall into an exempt class by reason of CTA09/S931I.

A dividend paid in respect of a share that is excluded from CTA09/Part 5 for any other reason cannot fall within S931I, whether or not it is held for an unallowable purpose as described in S531E.

See INTM654010 regarding an anti-avoidance rule that can apply to dividends in respect of shares accounted for as liabilities and other shares that are part of arrangement to produce an interest like return.