D4.905 Basic calculation and requirements for underlying tax relief
FA 2009 introduced the exempt distribution regime which broadly provides that most dividends received by a UK company on or after 1 July 2009 (from the UK or overseas) will be exempt from corporation tax (see Division D5.1). The provisions discussed in this article apply to overseas dividends received on or after 1 July 2009 that are not exempt and all other overseas dividends received before 1 July 2009.
In nearly all jurisdictions, dividends paid by a company represent the distribution of its post-tax profits. Where the company paying the dividend is resident outside the UK and has paid foreign tax on its profits, any taxation of the dividend in the hands of the UK shareholder results in double taxation of those profits.
Accordingly, credit is allowed against UK tax not only for withholding tax, but also, in certain situations, for foreign taxes borne on the relevant profits (D4.908) out of which the dividend is paid (underlying tax)1.
Rate of underlying tax
The basic calculation of the underlying tax rate where it is available is as follows—
– Actual tax paid is the tax paid by the overseas company in the accounting period to which the dividend relates. Companies can specify the profits of a particular accounting period as the source of a dividend, but they cannot specify the type of profits out of which a dividend is paid.