New special rule: distributions to participators in close companies etc
260.Paragraph 131 introduces paragraphs 132 to 136 which amend Part 4 of ITTOIA. They provide new charges on UK and foreign dividends and other distributions received (including loans being released) during a temporary period of non-residence.
261.Paragraph 132 inserts new section 368A in Chapter 1 of Part 4 of ITTOIA. It explains that the meaning of certain terms used in the temporary non-residence provisions is given by Part 4 of this Schedule. It also contains a general rule providing that no double taxation relief arrangement is to be read as preventing a charge to income tax arising by virtue of the temporary non-residence provisions.
262.Paragraph 133 inserts new section 401C in Chapter 3 of Part 4 of ITTOIA. This provision charges relevant UK distributions that arose during a temporary period of non-residence in relation to a year for which the individual was resident, but the UK charge was limited by the terms of a double taxation treaty. If the UK distribution arose in a year for which the individual was non-resident, new section 812A applies instead (see paragraph 138).
263.Subsection (1) of new section 401C provides the conditions for the section to apply. Where there is a double taxation treaty in place between the UK and the territory in which the individual is temporarily non-resident the tax charge when the relevant distribution is made will have been eliminated or restricted to 10% or 15% of the distribution (including the one-ninth tax credit if applicable).
264.Subsections (2) to (4) of new section 401C provide that the amount of the Chapter 4 charge is added to total income in the year of return with a credit for the tax on the distribution itself so as to avoid double taxation.
265.Subsection (5) of new section 401C explains the taxation treatment if the distribution is made in the treaty non-resident part of the year of return.
266.Subsection (6) of new section 401C defines ‘relevant distribution’. The company making the distribution must be a close company and the individual must have been a material participator or an associate of a material participator in the company.
267.Subsection (7) of new section 401C provides that new section 401C does not apply to cash dividends that are paid in respect of post-departure trade profits.
268.Subsection (8) of new section 401C defines the term ‘post-departure trade profits’ for the purposes of subsection (7) as those arising to the company in an accounting period which begins after the start of the temporary period of non-residence and, where such profits arise in an accounting period straddling the start of that temporary period, so much of those profits which can be attributed, on a just and reasonable basis, to the time after the start of that temporary period.
269.Subsection (9) of new section 401C provides that the extent to which a dividend is paid in respect of post-departure trade profits should be determined on a just and reasonable basis.
270.Subsection (10) of new section 401C provides that the amount of tax to be allowed against the charge under this provision is so much as the tax paid for the year in which the distribution was made as is just and reasonable to attribute to the distribution.
271.Subsection (11) of new section 401C provides in applying section 393 (special rule for cash dividends on shares in an approved share incentive plan) a reference to a distribution being made is to a cash dividend being paid over.
272.Subsection (12) of new section 401C defines terms used in this section.
273.Paragraph 134 inserts new section 408A in Chapter 4 of Part 4 of ITTOIA (which deals with foreign dividends).
274.Subsection (1) of new section 408A provides that this section applies to an individual who is temporarily non-resident.
275.Subsection (2) of new section 408A provides that dividends are to be treated for the purpose of Chapter 4 as if the individual received or became entitled to them in the period of return.
276.Subsection (3) of new section 408A sets out the conditions that must apply for a dividend to fall within subsection (2). These conditions are that:
the individual receives or becomes entitled to the dividend in the temporary period of non-residence by virtue of being either a material participator in the company or an associate of such a participator at a relevant time;
the dividend is from a company which would be a close company if it were UK resident; and,
in the absence of this section, the individual would not be liable for tax under Chapter 4 in respect of the dividend but would have been so liable if they had received or become entitled to it in the period of return.
277.Subsection (4) of new section 408A defines the terms ‘associate’, ‘participator’, ‘material participator’ and ‘relevant time’ for the purposes of subsection (3) and provides that the subsection also applies where double taxation relief is available for the tax liability in question, even if no claim for such relief is actually made.
278.Subsection (5) of new section 408A provides that, where an individual is taxed on the remittance basis for the year of return, any dividend within subsection (3) which is remitted to the UK in the temporary period of non-residence will be treated as remitted to the UK in the period of return.
279.Subsection (6) of new section 408A provides that new section 408A does not apply to dividends within subsection (3) which are paid in respect of post-departure trade profits.
280.Subsection (7) of new section 408A defines the term ‘post-departure trade profits’ for the purposes of subsection (6) as those arising to the company in an accounting period which begins after the start of the temporary period of non-residence and, where such profits arise in an accounting period straddling the start of that temporary period, so much of those profits which can be attributed, on a just and reasonable basis, to the time after the start of that temporary period.
281.Subsection (8) of new section 408A provides that the extent to which a dividend is paid in respect of post-departure trade profits should be determined on a just and reasonable basis.
282.Subsection (9) of new section 408A provides that, where section 406 or 407 of ITTOIA applies to the dividend, references in this section to a dividend being received by the individual are to a cash dividend being paid to the individual or to a dividend treated as paid to the individual
283.Subsection (10) of new section 408A defines terms used in this section.
284.Paragraph 135 inserts new section 413A in Chapter 5 of Part 4 of ITTOIA. The section applies to stock dividends from UK companies in the same way that new section 401C applies to other distributions from UK companies. Accordingly, the commentary in paragraphs 262 to 272 above applies with appropriate modifications.
285.Paragraph 136 inserts new section 420A in Chapter 6 of Part 4 of ITTOIA. This provision applies to loans released in a period of temporary non-residence.
286.Subsection (1) of new section 420A provides that this section applies where an individual is temporarily non-resident.
287.Subsection (2) of new section 420A provides that debts within subsection (3) are treated as if they had been released or written off in the period of return.
288.Subsection (3) of new section 420A provides that a debt is within this subsection if:
the debt is all or part of a debt in respect of a loan or advance made by a company to the individual;
the debt is released or written off in the temporary period of non-residence; and,
in the absence of this section, the individual would not be liable for tax under Chapter 6 of Part 4 of ITTOIA in respect of the release or write-off of the debt, but would have been liable if the debt had been released or written off in the period of return.
289.Subsection (4) of new section 420A provides that subsection (3) applies where double taxation relief is available for the tax liability in question, even if no claim for such relief is actually made.
290.Paragraph 137 inserts new section 689A in Chapter 8 of Part 5 of ITTOIA 2005 dealing with distributions not charged by other provisions of ITTOIA.
291.Subsection (1) of new section 689A provides that new section 689A applies if an individual is temporarily non-resident.
292.Subsection (2) of new section 689A provides that distributions within subsection (3) are to be treated for the purpose of Chapter 8 of Part 5 of ITTOIA as if the individual received or became entitled to them in the period of return.
293.Subsection (3) of new section 689A defines the conditions in which distributions are to be treated under the rule provided by subsection (2). These conditions are that:
the individual receives or becomes entitled to the distribution in the temporary period of non-residence by virtue of being either a material participator in the company or an associate of such a participator at a relevant time;
the distribution is from a close company or from a company which would be a close company if it were UK resident; and
in the absence of this section, the individual would not be liable for tax under Chapter 8 of Part 5 of ITTOIA in respect of the distribution but would have been so liable if they had received or become entitled to it in the period of return.
294.Subsection (4) of new section 689A defines the terms ‘associate’, ‘participator’, ‘material participator’ and ‘relevant time’ for the purposes of subsection (3) and provides that the subsection also applies where double taxation relief is available for the tax liability in question, even if no claim for such relief is actually made.
295.Subsection (5) of new section 689A provides that, where an individual is taxed on the remittance basis for the year of return, any distribution within subsection (3) which is relevant foreign income and is remitted to the UK in the temporary period of non-residence will be treated as remitted to the UK in the period of return.
296.Subsection (6) of new section 689A defines the term ‘remitted to the UK’ for the purposes of this section.
297.Paragraph 138 inserts new section 812A in Chapter 1 of Part 14 of ITA.
298.Subsection (1) of new section 812A provides that new section 812A applies where:
an individual is temporarily non-resident;
the individual’s income tax liability is limited under section 811 of ITA;
the non-resident year falls within the temporary period of non-residence; and
the individual’s income for that tax year includes relevant investment income.
299.Subsection (2) of new section 812A provides that the total income, as defined by Step 1 in section 23 of ITA, on which the individual is taxed for the year of return, is to be increased by an amount which is equal to the amount of the relevant investment income (“amount X”).
300.Subsection (3) of new section 812A provides that a credit is to be allowed for the notional UK tax on relevant investment income against the individual’s income tax liability for the year of return to the extent that the relevant investment income does not exceed amount X.
301.Subsection (4) of new section 812A provides that ‘relevant investment income’ is income where:
the income is chargeable under either Chapter 3 or Chapter 5 of Part 4 of ITTOIA;
the distributing company is a close company;
the income either arises or is treated as arising to the individual because they were a material participator in the company or an associate of such a participator at a relevant time.
302.Subsection (5) of new section 812A provides that income within subsection (4) in the form of a cash or stock dividend is not relevant investment income to the extent that the dividend is paid, or the share capital is issued, in respect of post-departure trade profits.
303.Subsection (6) of new section 812A defines the terms ‘post-departure trade profits’ for the purposes of subsection (5) as those arising to the distributing company in an accounting period which begins after the start of the temporary period of non-residence and, where such profits arise in an accounting period straddling the start of that temporary period, so much of those profits which can be attributed, on a just and reasonable basis, to the time after the start of that temporary period.
304.Subsection (7) of new section 812A defines the term ‘notional UK tax’ on relevant investment income for the purpose of subsection (3) as the total income included within amount A in section 811 of ITA less any credit for foreign tax paid in respect of that income under Chapter 2 of Part 2 of TIOPA for the non-resident year.
305.Subsection (8) of new section 812A provides that the extent to which a dividend is paid, or share capital is issued, in respect of post-departure trade profits, and the extent to which a sum included within amount A is a sum in respect of relevant investment income should both be determined on a just and reasonable basis.
306.Subsection (9) of new section 812A provides that double taxation arrangements are not to be read as preventing the individual from being chargeable to income tax under this section.
307.Subsection (10) of new section 812A provides that the meaning of the terms ‘temporarily non-resident’, ‘the temporary period of non-residence’, ‘the year of departure’ and ‘the period of return’ is as defined in Part 4 of this Schedule.
308.Subsection (11) of new section 812A defines the terms ‘associate’, ‘participator’, ‘material participator’, ‘relevant time’ and ‘year of return’ for the purposes of this section.
