Income and Corporation Taxes Act 1988

PART I ACCEPTABLE DISTRIBUTION POLICY

1 The provisions of this Part of this Schedule have effect for the purposes of paragraph (a) of subsection (1) of section 748.

2 (1) Subject to sub-paragraph (2) below, a controlled foreign company pursues an acceptable distribution policy in respect of a particular accounting period if, and only if—

(a) a dividend which is not paid out of specified profits is paid for that accounting period or for some other period which, in whole or in part, falls within that accounting period; and

(b) the dividend is paid during, or not more than eighteen months after the expiry of, the period for which it is paid or at such later time as the Board may, in any particular case, allow; and

(c) the dividend is paid at a time when the company is not resident in the United Kingdom (whether or not it is at that time a controlled foreign company); and

(d) the proportion of the dividend or, if there is more than one, of the aggregate of those dividends which is paid to persons resident in the United Kingdom represents at least 50 per cent. of the company’s available profits for the accounting period referred to in paragraph (a) above or, where sub-paragraph (4) or (5) below applies, of the appropriate portion of those profits;

and for the purposes of this sub-paragraph a dividend which is not paid for a specified period shall be treated as paid for the period or periods the profits of which are, in relation to the dividend, the relevant profits for the purposes of section 799.

(2) In the case of a controlled foreign company which is not a trading company, sub-paragraph (1) above shall have effect with the substitution of 90 per cent. for 50 per cent.

(3) For the purposes of this Part of this Schedule, a dividend represents those profits of the controlled foreign company in question which in relation to that dividend are the relevant profits for the purposes of section 799 and, accordingly, where those profits are the profits of a period which falls partly within and partly outside an accounting period of that company, the necessary apportionment shall be made to determine what proportion of those profits is attributable to that accounting period.

(4) This sub-paragraph applies where—

(a) throughout the accounting period in question all the issued shares of the controlled foreign company are of a single class, and

(b) at the end of that accounting period some of those shares are held by persons resident outside the United Kingdom, and

(c) at no time during that accounting period does any person have an interest in the company other than an interest derived from the issued shares of the company;

and in a case where this sub-paragraph applies the appropriate portion for the purposes of sub-paragraph (1)(d) above is the fraction of which the denominator is the total number of the issued shares of the company at the end of the accounting period in question and, subject to sub-paragraph (8) below, the numerator is the number of those issued shares by virtue of which persons resident in the United Kingdom have interests in the company at that time.

(5) This sub-paragraph applies where—

(a) throughout the accounting period in question there are only two classes of issued shares of the controlled foreign company and, of those classes, one (“non-voting shares”) consists of non-voting fixed-rate preference shares and the other (“voting shares”) consists of shares which carry the right to vote in all circumstances at general meetings of the company; and

(b) at the end of that accounting period some of the issued shares of the company are held by persons resident outside the United Kingdom; and

(c) at no time during that accounting period does any person have an interest in the company other than an interest derived from non-voting or voting shares;

and in a case where this sub-paragraph applies the appropriate portion of the profits referred to in sub-paragraph (1)(d) above is the amount determined in accordance with sub-paragraph (6) below.

(6) The amount referred to in sub-paragraph (5) above is that given by the formula—

where—

• P is the amount of any dividend falling within (a) and (b) of sub-paragraph (1) above which is paid in respect of the non-voting shares or, if there is more than one such dividend, of the aggregate of them;

• Q is, subject to sub-paragraph (8) below, the number of the non-voting shares by virtue of which persons resident in the United Kingdom have interests in the company at the end of the accounting period in question;

• R is the total number at that time of the issued non-voting shares;

• X is the available profits for the accounting period in question;

• Y is, subject to sub-paragraph (8) below, the number of voting shares by virtue of which persons resident in the United Kingdom have interests in the company at the end of that accounting period; and

• Z is the total number at that time of the issued voting shares.

(7) For the purposes of sub-paragraph (5)(a) above, non-voting fixed-rate preference shares are shares—

(a) which are fixed-rate preference shares as defined in paragraph 1 of Schedule 18; and

(b) which either carry no right to vote at a general meeting of the company or carry such a right which is contingent upon the non-payment of a dividend on the shares and which has not in fact become exercisable at any time prior to the payment of a dividend for the accounting period in question.

(8) In any case where the immediate interests held by persons resident in the United Kingdom who have indirect interests in a controlled foreign company at the end of a particular accounting period do not reflect the proportion of the shares or, as the case may be, shares of a particular class in the company by virtue of which they have those interests (as in the case where they hold, directly or indirectly, part of the shares in a company which itself holds, directly or indirectly, some or all of the shares in the controlled foreign company) the number of those shares shall be treated as reduced for the purposes of sub-paragraph (4) or (6) above, as the case may be, to such number as may be appropriate having regard to—

(a) the immediate interests held by the persons resident in the United Kingdom; and

(b) any intermediate shareholdings between those interests and the shares in the controlled foreign company.

(9) The definition of “profits” in section 747(6)(b) does not apply to any reference in this paragraph to specified profits or to relevant profits for the purposes of section 799.

3 (1) Subject to sub-paragraphs (2) and (5) below, for the purposes of this Part of this Schedule, the available profits of a controlled foreign company for any accounting period shall be ascertained by—

(a) determining what would be the relevant profits of that period for the purposes of section 799 if a dividend were paid for that period; and

(b) deducting so much of those relevant profits as consists of an excess of capital profits over capital losses.

(2) If, for any accounting period of the controlled foreign company which is of less than 12 months duration, the available profits, as ascertained under sub-paragraph (1) above, are less than the chargeable profits (determined on the additional assumptions in section 750(3)(a)) then, if the Board so declare, for the purposes of this Part of this Schedule the available profits for the accounting period shall be those chargeable profits.

(3) The definition of “profits” in section 747(6)(b) does not apply to the reference in sub-paragraph (1)(a) above to relevant profits for the purposes of section 799.

(4) In sub-paragraph (1)(b) above “capital profits” means gains—

(a) which accrue on the disposal of assets; and

(b) which, if the company were within the charge to corporation tax in respect of the activities giving rise to those disposals, would not be taken into account as receipts in computing the company’s income or profits or gains or losses for the purposes of the Income Tax Acts;

and the expression “capital losses” shall be construed accordingly.

(5) In any case where—

(a) a controlled foreign company pays a dividend for any period out of specified profits, and

(b) those profits represent dividends received by the company, directly or indirectly, from another controlled foreign company,

so much of those specified profits as is equal to the dividend referred to in paragraph (a) above shall be left out of account in determining, for the purposes of this Part of this Schedule, the available profits of the controlled foreign company referred to in that paragraph for any accounting period.

4 (1) For the purposes of this Part of this Schedule, where—

(a) a controlled foreign company pays a dividend (“the initial dividend”) to another company which is also not resident in the United Kingdom, and

(b) that other company or another company which is related to it pays a dividend (“the subsequent dividend”) to a United Kingdom resident, and

(c) the subsequent dividend is paid at a time when the company paying it is not resident in the United Kingdom; and

(d) the subsequent dividend is paid out of profits which are derived, directly or indirectly, from the whole or part of the initial dividend,

so much of the initial dividend as is represented by the subsequent dividend shall be regarded as paid to the United Kingdom resident.

(2) For the purposes of this paragraph, one company is related to another if the other—

(a) controls directly or indirectly, or

(b) is a subsidiary of a company which controls directly or indirectly,

at least 10 per cent. of the voting power in the first-mentioned company; and where one company is so related to another and that other is so related to a third company, the first company is for the purposes of this paragraph related to the third, and so on where there is a chain of companies, each of which is related to the next.