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HMRC internal manual

International Manual

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HM Revenue & Customs
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Distribution exemption: Interpretation: franked investment income

Any exempt distribution included in franked investment income

Franked investment income (FII) is defined in CTA10/S1126 as any distribution received by a UK resident company that has a tax credit attached to it.

FA 2009 amended the rules relating to tax credits arising in respect of dividend income. CTA10/S1109 provides that a tax credit is available in respect of an exempt distribution, regardless of whether the distribution is UK or foreign. Therefore any exempt distribution will be included in FII.

FII is relevant for the purposes of calculating entitlement to small companies’ relief. The rules were amended by FA 2009, and by virtue of CTA10/S32 FII received from either a UK or a foreign company is taken into account in computing the profits of a company for the purposes of calculating entitlement to small companies’ relief.

If foreign tax is withheld from a dividend that is exempt under CTA09/Part 9A, TIOPA10/S112 requires the foreign tax to be deducted from the measure of income and so only the net income and the tax credit calculated by reference to the net dividend are included in FII.