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Proposed new exemption system for UK and foreign distributions - Part I

Consultation is ongoing, but it would appear that the Government is proceeding with the introduction of the above exemption as part of the Finance Bill 2009. The new system represents a move towards a territorial basis of taxation as opposed to the current regime, where foreign profits can be taxed either under the controlled foreign companies (CFC) rules (which continue to apply in the medium term), or on repatriation, with credit for foreign taxes.

This is a significant change to the UK tax system.

The new rules will apply to large and medium-sized UK companies and UK permanent establishments of large and medium-sized foreign companies receiving foreign dividends. They do not apply to small companies (EC definition). Broadly the following dividends should fall within this exemption:-

  • Dividends from companies controlled by the recipient
  • Distributions in respect of non-redeemable ordinary shares
  • Distributions from portfolio holdings
  • Dividends derived from transactions not designed to reduce tax
  • Dividends in respect of shares accounted for as liabilities.

Other taxable dividends

Existing UK credit rules will still apply to taxable dividends.



Date: 5th March, 2009
Author: Cathy Corns


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