In recent days there have been two significant developments relating to the UK’s taxation of corporates receiving dividends from non-UK resident companies. These developments are of potential importance to any group with UK taxpaying members.  

Firstly, in one of his “Pre-Budget Report” announcements made on 24th November, the Chancellor confirmed an intention to introduce an exemption for such dividends in Finance Act 2009. This was first mooted by the government in 2007. Detailed draft legislation in expected later this month.  

Secondly, on 27th November the High Court released its judgement in the British American Tobacco test case in what has become known as the “FII GLO”, a piece of group taxpayer litigation relating to the compatibility of the UK’s current system of taxation of foreign dividends with EU law. The court’s opinion was that, in general terms, the UK’s system of taxing dividends from EU companies whilst exempting UK to UK dividends has “at all material times infringed” EU law. Further, the court ruled that taxpayers were entitled to reclaim tax paid on such dividends regardless of the government’s attempt to curtail taxpayers’ remedies, the relevant legislation being found to contravene EU law. However, the court refused to apply similar principles to non-EU dividends.  

The decision also ruled on the compatibility of aspects of the now historic “Advance Corporation Tax” and “Foreign Income Dividend” regimes.  

It is notable that some material issues have been referred back to the European Court of Justice, notably the position where a dividend is received in the UK and the tax paid on the relevant underlying profits funding the dividend was not suffered by the dividend paying company itself, but rather by a subsidiary. It is also almost inevitable that the decision will be appealed through the UK courts to the highest level. As such, although the future position may be clarified by next year’s Finance Act, the final position on these issues is still some way from resolution.