Foreign portfolio dividends and tax refunds

In the absence of a double tax treaty, UK resident companies are able to claim credit for the underlying overseas tax suffered on dividends received from non UK companies only where at least 10% of the voting power in the foreign company is held by the UK company. Where the voting control is less than 10%, the UK company has been denied a claim to credit for the foreign tax against the equivalent UK corporation tax liability on dividends.

The ECJ has held, in its judgment in the FII GLO case, that it is discriminatory for the UK to exempt dividends received from other UK companies, whilst taxing those received from companies resident in other countries (whether they be in, or outside, the EU/EEA).

The recently issued discussion document on the taxation of foreign profits indicates that the UK rules will now be changed to comply with the ECJ opinion, thereby allowing either for credit to be claimed by UK companies in respect of foreign tax suffered on dividends received on portfolio shareholdings, i.e., those conferring less than 10% voting control on the UK resident shareholder, or by exempting such dividends from UK tax.

UK companies who have paid corporation tax on portfolio dividends in the past 6 years should now make protective claims for the recovery of that tax on the basis that credit should have be available for the underlying foreign tax suffered. There is a prospect that the expected amendment to the relevant law may also include a block on retrospective claims where these have not already been made.