Taxation of Foreign Profits - Finance Act 2009 Changes

After a long running consultation process concerning the taxation of foreign profits, the 2009 Finance Act contained confirmation that the measures will now be introduced.  They are generally as previously announced.   

Foreign dividends

Changes to the taxation of foreign distributions will apply to dividends and other distributions received from 1 July 2009.  Foreign dividends/distributions received are currently chargeable to corporation tax, with a double tax relief (DTR) credit given for:

• any foreign tax withheld, and
• (for shareholdings of 10 per cent or more) on foreign tax charged on the profits out of which the dividend is paid (underlying tax).

From 1 July 2009, the vast majority of foreign distributions received by UK companies (including small and medium sized companies) will generally be exempt from UK corporation tax, although anti-avoidance provisions will apply in certain circumstances.

An important point to note is that overseas dividend withholding tax previously did not represent a significant cost to UK companies as it was generally creditable against the UK tax liability arising on the dividend receipt using DTR.  However, the exemption of dividend income will mean that such withholding tax will be a cost in the future.

With the introduction of the foreign dividend exemption, it may be appropriate to incorporate overseas branches to avoid any UK tax on profits distributed.

World-wide debt cap

Finance expense (such as interest) payable by UK resident members of a corporate group will be subject to a cap equal to the consolidated gross finance expense of the group.  There will be a definition of what is included in the “finance expense” in the final legislation.

The cap will apply to the finance expense payable in accounting periods beginning on or after 1 January 2010.  HMRC has previously announced that the rules will not apply to small and medium sized groups (being less than 250 employees and with turnover not exceeding €50m and/or assets not exceeding €43m).

For further information or specific advice on the above please contact Craig Hughes on 0115 983 5595 or 07717 840596 or email chughes@edftax.co.uk.