Tax & Accounting News

Tax Credits On Foreign Dividends

29/10/2009

UK taxpayers with shareholdings in foreign firms can now claim a national tax credit when they receive a foreign dividend, following a ruling in the European courts and legislative changes from the UK government.

Until recently, the absence of a tax credit meant higher-rate taxpayers were charged an effective tax rate of 32.5 per cent on dividends from overseas companies, compared to 25 per cent for UK dividends.

The European courts ruled in 2004 that residents were entitled to tax credits on foreign shareholdings, and the UK government followed suit in the 2008 Budget, which confirmed tax credits should be available for foreign dividends received, as long as the individual held less than 10 per cent of the issued share capital of the overseas company. This year’s Budget extended that further, to shareholdings of over 10 per cent, so long as the company concerned was based in a ‘qualifying territory’ – one with which the UK had a double tax treaty with a non-discrimination provision.

Although the UK legislation was only amended for 2008/09 onwards, taxpayers can still claim national tax credits on foreign dividends received in 2007/08 on the basis of the European decision. Taxpayers have until 31 January 2010 to submit an amended return.

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