UK and International Tax news
UT Hears Appeal On Distributions From A Non UK Company
Wednesday 29th May 2024
The Upper Tribunal has recently confirmed the decision of the FTT in a case involving distributions received by the taxpayer from a non UK company.
In A Beard v HMRC [2024 UKUT 73 TCC], the appellant was a UK resident and a shareholder in Glencore PLC (“Glencore”), a publicly listed company incorporated in Jersey and domiciled in Switzerland. He had acquired his shares following the corporate restructuring of the company in 2011, and profit participation certificates issued to him as an employee. As a shareholder, he received cash distributions in each of the tax years 2011/12 to 2015/16, which totalled approximately £150m. In each case, the distributions were paid from the share premium account of the company rather than retained earnings. In 2015, Glencore also made an in-specie distribution to its shareholders of shares in a subsidiary company, Lonmin plc (“Lonmin”), including the appellant.
In October 2019, HMRC issued a closure notice assessing the appellant to income tax on the distributions. The appellant appealed to the FTT on the basis that the distributions were of a capital nature subject to capital gains tax and not income tax in the UK.
The FTT held that the distributions were dividends of the non-UK resident company and were not dividends of a capital nature. The FTT treated the in specie distribution paid in the 2015/16 tax year in the same way as the distributions paid in cash.
The appellant appealed to the UT on two grounds, being (i) whether the payments of share premium were dividends within s.402 ITTOIA 2005, and (ii) whether they were dividends of a capital nature within s.402(4). The relevant UK legislation provides that income tax is charged on dividends of a non UK company, which do not include dividends of a capital nature.
The UT considered that UK case law had long established that in determining the correct tax treatment of a payment by a non UK company, such as Glencore, the correct approach was to establish the character of the payment under the law of the jurisdiction in which the paying company is incorporated and apply UK tax legislation to the payment.
The relevant Jersey legislation was the Companies (Jersey) Law 1991. Subsequent amendments to the CJL replaced, in particular, provisions allowing distributions to be made only out of realised and unrealised profits to include the share premium to be freely distributable. In addition, amendment 9 to the CJL removed from Jersey company law the doctrine of the maintenance of capital.
The UT held, following case law in First Nationwide, Esso Petroleum, and Memec, that the distributions were dividends within s.402.
As regards to whether the dividends were of a capital nature, the UT held that “where the share premium is freely distributable, subject only to a solvency requirement, similar to the position in First Nationwide, the corpus of capital of the company is not reduced because the share premium is in no different a legal position from distributable profits”.
With regard to the in-specie distribution, the UT held that they did not find any different analysis applied to the receipt of the Lonmin shares from the cash dividends.
It is noted that HMRC’s manual at SAIM5210 makes reference to dividends of a capital nature and whether the corpus of the asset is left intact after the distribution. The importance lies not in what is distributed but rather in the effect of that distribution on the company.
For more information on the above decision, please contact Keith Rushen on 0207 486 2378.
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