Navigating the UK’s corporate dividend exemption regime as a small company
Arvinder Matharu
by Arvinder Matharu
The United Kingdom has long had a very attractive holding company regime. These attractions encompass one of the largest networks of double tax treaties (DTT) and no withholding tax on outbound dividends, to name but a few. One further appeal is the corporate dividend exemption regime which is the subject of this article. The regime is discussed in the context of “small companies” only. A different regime exists for companies that are not small, which is outside the scope of this article.
The basic rule is that dividends received by a small company are taxable (at rates of 19%/25%) whether they are received from a UK or an overseas company, unless they fall within one of the exempt categories.
A company is considered a “small company” if it has:
Less than 50 staff, and
Either
A turnover not exceeding EUR 10 million, or
A balance sheet total not exceeding EUR 10 million.
Complications arise where we need to aggregate staff numbers and financials of the payee company with the enterprises associated with it. A detailed analysis of these other enterprises would be required to determine whether the payee company is small.
Where the company is small, dividends received by it will be exempt if the following conditions are met:
The payer is a UK resident (or resident of a qualifying territory, which is broadly any jurisdiction with which the UK has a DTT that contains a non-discrimination clause). The company must have only one place of residence;
The dividend is not interest classed as a dividend;
No deduction is allowed to a resident of any territory outside the UK under the law of that territory in respect of that dividend; and
The dividend is not paid as part of a tax advantage scheme.
Whilst the conditions appear to be straightforward, there are some practical difficulties and traps for the unwary.
With condition a., and as mentioned previously, the paying company must have only place of residence. Suppose we have a US subsidiary of a UK holding company. The US subsidiary will be US resident under its incorporation rule. If, however, it is managed and controlled from the UK, it would also be UK resident and therefore a dual resident. In this scenario, condition a. will not have been met, and a dividend paid from the US subsidiary to the UK holding company would be liable to UK corporation tax.
Furthermore, with condition a., a treaty may contain a non-discrimination clause but HMRC (the UK tax authority) may not recognise it on the basis that it does not satisfy the criteria of a “qualifying territory”. In the view of the HMRC, the meaning of qualifying territory requires that the non-discrimination provision effects a “national of a state”. Jersey and Guernsey are two examples of territories that do not meet this definition. This is a trap for advisors who may not be aware of HMRC’s view.
If the exemption for a small company is not met, consideration should be given to claiming double tax relief.
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Arvinder Matharu is a Partner in the tax department of Prager Metis. He focuses on providing tax consultancy on a range of issues to include trusts and estates, inheritance tax planning, capital gains tax, remittance basis and non-domiciled planning, residency planning, advising on R&D tax credits, review of tax minimisation strategies for US nationals living in the UK. Arvinder prides himself on explaining complex tax advice in a manner that the client can understand and take action from. Contact Arvinder.
