Opportunity to reclaim tax on foreign dividends received

Until 2009, UK tax law imposed a corporation tax charge on dividends UK companies received from non-UK resident companies.  For most foreign dividends, this corporation tax charge came to an end when the UK’s dividend received exemption took effect on 1 July 2009. By contrast, UK corporation tax has never been chargeable on dividends a UK company receives from another UK company.

The Court of Justice of the EU recently decided that this UK/non-UK difference of treatment did not comply with EU rights. The practical impact is to fatally wound the UK’s former tax charge on foreign source dividends. Any UK company which paid corporation tax on foreign dividends under the pre-July 2009 regime should urgently consider making a claim to HMRC based on this finding against HMRC for repayment of corporation tax paid. 

Under the pre-July 2009 system, UK CT payable was reduced by what is called double tax relief, being a credit against the UK tax liability for both withholding tax legally deducted from the dividend payment by the law of the territory of residence of the payer and, for ≥10% shareholdings, by underlying tax. The EU Court decision will have most impact on dividends received from sub-10% holdings as these did not attract any credit for underlying tax.

Many companies have already filed repayment claims with HMRC. However any affected UK company that has not yet lodged claims based on the franked investment income group litigation order (referred to as the FII GLO) – particularly companies with portfolio dividends where there is more likelihood of UK tax paid – should do so by 11 December 2012 (the sixth anniversary of the original December 2007 European Court judgement). Claims will however not progress until the parallel litigation on the time limit concerning claims is concluded.