Cautious Welcome Given To UK Foreign Dividend Proposals

by Robert Lee, Tax-News.com, London

27 November 2008

Chancellor Alistair Darling's pre-budget announcement that most foreign dividends from overseas subsidiaries will become exempt from tax has been broadly welcomed by business and tax advisors, although, as ever, the devil may be in the detail.

The exemption, outlined by Darling on Monday, will be available to medium and large companies from March 2009 regardless of the level of shareholding and brings the UK into line with many other European countries.

Stephen Herring, Senior Tax Partner BDO Stoy Hayward, comments: "The Chancellor has rightly bowed to the enormous pressure to the UK corporate tax base following the decisions of a number of high profile listed groups to migrate their headquarters from the UK to Ireland and other, more favourable tax jurisdictions."

However, BDO warns that UK industry will wish to examine the fine print of the legislation closely to assess the limitations including the proposed anti-avoidance legislation and the restrictions on interest relief.

Under the proposed reforms, from 2009, UK corporation tax deductions for interest expenses will be restricted under a new "worldwide debt cap on interest". This has been designed to prevent UK based groups from setting their group-wide borrowing costs against UK taxable profits whilst being exempt from tax on overseas profits. However, it is expected that a number of groups will be unfairly prejudiced by a blanket restriction and resent the reduction in tax relief on the costs of expanding overseas.

In addition, a new targeted anti-avoidance rule and changes to the UK controlled foreign company rules are set to be introduced, and these could offset the benefits of the dividend exemption by increasing the costs and complexity of the UK corporate tax system. As a result, the jury remains out as to whether these changes represent an overall improvement in the UK's foreign corporate income taxation system.

"There is a very fine balance between protecting the Exchequer and promoting the UK as a competitive tax regime for global businesses," Herring observed. "The Chancellor is no nearer solving this conundrum."

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