“397ATax credits for distributions of non-UK resident companies: UK residents and eligible non-UK residents

(1)

This section applies where a UK resident or eligible non-UK resident receives a relevant distribution made by a non-UK resident company, provided that—

(a)

the company is not an offshore fund (within the meaning of section 756A of ICTA), and

(b)

the person is a minority shareholder in the company at the time the distribution is received.

(2)

The person is entitled to a tax credit equal to one-ninth of the amount or value of the grossed up distribution (but see subsections (3) and (6)).

(3)

Subsection (2) only applies so far as the distribution is brought into charge to tax, and accordingly if the person's total income is reduced by any deductions which fall to be made from the distribution, the tax credit for the distribution is reduced in the same proportion as the distribution.

(4)

The person may claim to deduct the tax credit from the income tax charged on the person's total income for the tax year in which the distribution (or the part of the distribution to which the tax credit relates) is brought into charge to tax.

(5)

If a distribution is, or is treated under any provision of the Tax Acts as, the income of a person (“P”) other than the recipient (“R”), P (not R) is treated as receiving it for the purposes of this section (and so P (not R) is entitled to a tax credit if P falls within subsection (1)).

(6)

This section is subject to the following provisions—

• section 171(2B) of FA 1993 (no tax credit for distributions in respect of assets in Lloyd's member's premium trust fund),

• section 504(4) of ITA 2007 (disapplication of certain provisions for income of unauthorised unit trusts),

• section 592 of ITA 2007 (no tax credits for borrower under stock lending arrangement),

• section 593 of ITA 2007 (no tax credits for interim holder under repo), and

• section 594 of ITA 2007 (no tax credits for original owner under repo).

(7)

In this section—

“eligible non-UK resident”, in relation to a distribution, means an individual who, at any time in the tax year in which the distribution (or the part of the distribution to which the tax credit relates) is brought into charge to tax, is a non-UK resident who meets the condition in section 56(3) of ITA 2007 (residence etc of claimants),

“grossed up distribution” means the distribution increased by the amount of any tax chargeable in respect of the distribution directly or by deduction under the laws of the territory in which the company is resident, including special withholding tax,

“minority shareholder”, in relation to a company, has the meaning given in section 397C,

“relevant distribution”, in relation to a person, means—

(a)

a qualifying distribution arising in a relevant tax year,

(b)

a cash dividend paid over to the person under paragraph 68(4) of Schedule 2 of ITEPA 2003 (cash dividend paid over if not reinvested etc) in a relevant tax year, and

(c)

a dividend treated under section 407 as paid to the person in a relevant tax year,

“relevant tax year” means the tax year 2008-09 or a subsequent tax year, and

“special withholding tax” has the meaning given in section 107(3) of FA 2004.

(8)

Section 397B makes provision about the application of this section in the case of overseas dividends arising from manufactured overseas dividends (within the meaning of Chapter 2 of Part 11 of ITA 2007).

397BTax credits under section 397A: manufactured overseas dividends

(1)

This section applies where, under section 581 of ITA 2007, a person is treated as receiving an overseas dividend by virtue of having received a manufactured overseas dividend which is representative of an overseas dividend.

(2)

For the purposes of section 397A, the person is treated as receiving a relevant distribution made by a non-UK resident company that is not an offshore fund if, and only if, the manufactured overseas dividend is representative of such a distribution.

(3)

References in section 397A to the grossed up distribution have effect as if they were references to the gross amount of the overseas dividend of which the manufactured overseas dividend is representative, disregarding the amount of any overseas tax credit.

(4)

In this section—

“gross amount”, in relation to a manufactured overseas dividend, has the same meaning as in Chapter 2 of Part 11 of ITA 2007 (manufactured payments) (see section 589 of that Act),

“manufactured overseas dividend” and “overseas tax credit” have the same meaning as in Chapter 2 of that Part (see sections 581 and 591 of that Act), and

“overseas dividend” has the same meaning as in that Part (see section 567 of that Act).

397CMeaning of “minority shareholder”

(1)

In section 397A “minority shareholder”, in relation to a non-UK resident company, means a person whose shareholding in the company is less than 10% of the company's issued share capital.

(2)

Subsections (3) to (6) make provision about the circumstances in which shares form part of a person's shareholding in a company for the purposes of this section.

(3)

Shares form part of a person's shareholding in a company to the extent that the person is beneficially entitled to the shares or to a distribution arising in respect of the shares (or both).

(4)

Shares form part of a person's shareholding in the company where—

(a)

a person is a settlor in relation to a settlement, and

(b)

income arising from shares comprised in the settlement is treated for income tax purposes as the income of that person and of that person alone.

(5)

Shares form part of the shareholding in a company of a person (“P”) if—

(a)

they form part of the shareholding in the company of a person connected with P,

(b)

P transferred the shares to the connected person or arranged for the connected person to acquire the shares, and

(c)

the purpose of the transfer or arrangement was wholly or mainly to enable P to avoid tax.

(6)

Shares form part of a person's shareholding in a company if that person has transferred the shares to another person under a repo or stock lending arrangement.

(7)

In this section—

“repo” has the same meaning as in Part 11 of ITA 2007 (see section 569 of that Act),

“settlement” and “settlor” have the same meaning as in Chapter 5 of Part 5 of this Act, and

“stock lending arrangement” has the same meaning as in Part 11 of ITA 2007 (see section 568 of that Act).”