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HMRC internal manual

Savings and Investment Manual

Dividends and other company distributions: foreign dividends

Dividends from non-UK resident companies

Dividends from non-UK resident companies are taxable under Chapter 4 of Part 4 ofITTOIA05. Before the rewriting of the legislation under Tax Law Rewrite, the charge onforeign dividends was under Case IV or Case V of Schedule D.

The rewritten legislation largely integrates the charge on foreign dividends with thetaxation of the equivalent income from a UK source. But there are some differences. The UKcharge can include dividends and other distributions. These may include amounts of acapital nature and can operate to convert income that would otherwise be treated asinterest into distributions.

ITTOIA05/S402 therefore charges dividends and does not include the wider definition of adistribution. However, if a non-UK company makes a distribution that is not a dividend itmay be chargeable as interest, or as ‘income not otherwise charged’ (taxed underthe ‘sweep up’ provisions in Chapter 8 of Part 5 of ITTOIA05 (sections 687 to689). ITA07/S19 defines dividend income for the purposes of the tax rates applicable tosavings and investment income as including a ‘relevant foreign distribution’.This is a distribution of a non-UK resident company which is not taxable as a non-UKdividend under Chapter 4 of Part 4, but would be taxable as a distribution from a UKresident company if the company were UK resident.

The tax charge

The charge to tax on foreign dividends is on the full amount of the dividends arisingin the tax year (ITTOIA05/403). This is different to the paid basis that applies todividends and other distributions from other UK companies. See SAIM5020.

The person liable is the person receiving or entitled to receive the dividends. See SAIM2400 for an explanation of ‘entitlement’.

Dividends of a capital nature

ITTOIA05/S402 (4) excludes dividends of a capital nature. Local law will determinewhether a payment is income or capital in nature (CIR v Trustees of Joseph Reid(dec’d) (1949) 30TC431 and Rae v Lazard Investment Co Ltd (1963) 41TC1). See thecomment in Whiteman on Income Tax (Third Edition page 1107) on this.

“The proper test in such circumstances is, applying the locallaw, whether or not the corpus of the asset is left intact after the distribution. If itis not, the receipt will be a capital receipt; if it is, the payment will bechargeable.”