UK and International Tax news

Tax Treatment Of Distributions From Overseas Companies

Friday 30th November 2012

HMRC has recently confirmed its view on aspects of the tax treatment of payments received by companies in the UK in respect of shares held in foreign companies.

Part 9A of CTA 2009 contains the rules for the corporation tax treatment of distributions received by UK resident companies from both UK and foreign companies and whilst s.931A CTA 2009 provides that a charge to corporation tax  arises in respect of “dividends and other distributions”, the effect of Part 9A ensures that in most cases, distributions received by UK companies are exempt from tax.

The definition of distribution is taken from s.1000(1) CTA 2010 and includes any dividend, including a capital dividend, paid out of capital profit, and any other distribution out of the assets of the company made in respect of shares, except to the extent that the distribution represents a repayment of capital on the shares or is equal to any new consideration received by the company.

Following the judgment of the Court of Appeal in the case of HMRC v First Nationwide [2012] EWCA 278, HMRC’s view is that if a dividend payment is a distribution permitted in accordance with the law that governs the foreign company then in the absence of any evidence calling into question the legal form of the payment it will be treated as a dividend. 

Any other distribution out of assets made in respect of shares will be treated as a distribution, other than on a winding up, unless or to the extent that it represents a repayment of capital on the shares, or is equal to any new consideration received by the company.  Such distributions are likely to comprise redemptions at premium or repurchases of capital.

For companies incorporated in the UK under CA 2006 or its predecessors, capital will usually comprise nominal share capital. Where shares are issued at a premium, this will also be treated as part of the share capital. 

For companies that do not have share capital, for example, companies limited by guarantee, Part 23 CTA 2010 extends the definition of share to include stock or any other interest of a member of the company.

For foreign companies, it may be less clear what capital on the shares consists of. The facts may vary between cases, but HMRC would normally expect to treat as a distribution an amount that is distributable in accordance with the relevant company law, and is not made on winding up or as part of a procedure under the relevant company law for reducing share capital.

This is subject to s.1027A CTA 2010 which for the purposes of determining whether an amount is a repayment of capital on the shares, treats a distribution out of a reserve arising from a reduction of share capital as if it were made out of profits available for distribution otherwise than by virtue of the reduction. This will depend on whether s.1027A(4) applies or not to the reduction of share capital.

S.1025 CTA 2010 treats a repayment of share premium as forming part of the share capital where the premium account was created in respect of new consideration received on the issue of the share capital.  HMRC will normally, depending on application of the foreign company law, not treat a payment of out of a share premium account as a repayment of share capital in circumstances where under the foreign company law share premium is fully distributable and is not treated as forming part of the share capital.

If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.

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