Dividends and the dividend exemption
The general rule is that dividends paid by a UK company to another UK company out of post-tax profits are exempt from further taxation. The rule was extended to dividends paid on or after 1 July 2009 by a UK or overseas company to a company or branch within the charge to UK corporation tax, so that dividends received are exempt if the conditions for the exemption are met.
In general, dividends which fall to be taxed as trading profits, profits of a UK property business or insurance company profits will always fall outside the dividend exemption.
The dividend exemption rules and how they work depend on whether the recipient company is a “small company” or a “large company” but companies can always elect for exempt dividends to be taxable on a receipt by receipt basis.
This can sometimes reduce the rate of withholding tax under Double Tax treaties and may be beneficial if the recipient company has tax losses.
The structure of the legislation is complex, but the notes below outline the general provisions which apply.
Small Company Exemption
The definition of a small company is as follows:
• No more than 50 employees, and
• Annual turnover of less than €10 million, or
• Gross assets of less than €10 million
All companies which are not “small companies” are “large companies” for the purposes of the dividend exemption.
The small company exemption applies to dividends received where:
• The payer is resident in the UK or a qualifying territory. HMRC produce a list of qualifying territories, but essentially they are countries with which the UK has a comprehensive Double Taxation Treaty and contain a non-discrimination clause, and
• The dividend is not interest which has been re-categorised as a distribution, and
• The dividend has not been allowed as a deduction from taxable profits outside the UK. This applies to distributions from various funds and Unit Trusts not subject to the full equivalent of corporation tax on their profits, and
• The General Anti-Avoidance Rule that the distribution is not part of a scheme of tax avoidance is met.
A US LLC does not meet the residence test and distributions from a US LLC to a UK small company are taxable in full in the UK with no Double Tax Relief for the tax suffered by the members of the LLC.
Large Company Exemption
The large company exemption applies to dividends which fall in to one of five classes, is not re-categorised interest and where no deduction is allowed outside the UK.
The five classes of exempt dividend are:
• Where the recipient controls the payer (subject to detailed rules)
• Distributions in respect of non-redeemable ordinary shares
• Distributions in respect of portfolio holdings (broadly where the recipient controls less than 10% of the payer)
• Distributions from transactions not designed to reduce tax
• Dividends from shares accounted for as liabilities
There is a raft of anti avoidance legislation surrounding the dividend exemption, and the detailed rules need to be reviewed in each case.
Get in touch
If you have any questions or concerns regarding the UK Corporation Tax & Business Tax System please email