United Kingdom
Overseas issues
Issues
From 1 July 2009 UK companies will be exempt from corporation tax on most foreign dividends. This is highly beneficial for international real estate groups repatriating dividends from their foreign subsidiaries. The exemption will now apply to all UK companies (irrespective of size).
The quid-pro-quo is that the widely feared debt-cap proposals will also be introduced (along the lines already announced) for accounting periods starting after 31 December 2009. Broadly, these rules will restrict corporate tax relief on intra-group interest paid to overseas affiliates (up to a maximum level of interest paid on 'external' interest).
Comments
It was essential that the uncertainty over the UK tax treatment of overseas dividends should be resolved and, to that extent, this measure is to be welcomed. It is unsurprising that the Chancellor should seek to control broadly related interest tax relief as a quid pro quo for exempting dividends, to the extent that the tax free income derives from the debt funding giving rise to the interest expense.
However, it is extremely disappointing that the method adopted will be both administratively cumbersome and may, in certain cases, deny relief for wholly commercial financing costs of doing business in the UK.
Fundamentally, it is essential that steps are taken to shore up the eroding competitiveness of the UK corporate tax system. The current 28 per cent corporation tax rate is higher than many competitor European nations and the decision to maintain the current rate represents a lost opportunity to support the UK's status as a location for the emerging business sectors that the Chancellor is aiming to encourage.