Commentary

D4.922 Tainted dividends

Corporate tax
Corporate tax | Commentary

D4.922 Tainted dividends

Corporate tax | Commentary

D4.922 Tainted dividends

The provisions in this article were repealed for distributions paid on or after 1 July 2009 following the introduction of the exempt distribution regime (see Division D5.1).

A dividend on which eligible unrelieved foreign tax arises cannot be a qualifying foreign dividend. It is possible to have situations in which eligible unrelieved foreign tax arises on a dividend and there is a residual UK tax liability on the dividend, eg in the case of dividends paid through a holding company made up of high and low tax lower level dividends. These dividends are 'tainted' dividends for the purposes of the onshore pooling regime (see Example 1). As can be seen from this example a residual UK tax liability arises in this situation. In particular, overseas company B's dividend is not a qualifying foreign dividend because it includes a dividend from overseas company D to which the mixer cap has applied.

Example 1

A UK parent company owns Overseas Company A and Overseas Company B. Overseas Company B also owns Overseas Company C and D (who are resident in different territories). The following dividends are paid through the group—

Dividend paid byDividendUnderlying taxUnderlying tax rate
C (paid to B)90,00030,00025%
D (paid to B)13,0007,00035%
B (paid to UK Co)103,00037,00026.4285%
A (paid to UK Co)24,00016,00040%

UK corporation tax computation

Overseas company AOverseas company B*
Dividend24,000103,000
Underlying tax16,00037,000
Overseas dividend income40,000140,000
UK corporation tax at 30%12,00042,000
Deduct: Double taxation relief—
Overseas company A12,000
Overseas company B
Dividend from

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