On 9 December 2008, HMRC also issued draft legislation on the taxation of the foreign profits of companies.

Background

The proposals include an exemption from tax for dividends (UK and foreign) received by large and medium-sized companies which fall within an exempt class. Small companies are excluded from benefitting from the exemptions. Included in the various exempt classes are dividends or other distributions made in respect of non-redeemable ordinary shares or where the recipient controls the payer or where the recipient, or its connected persons, hold (either by themselves or together) 10% or less of the issued share capital of the payer (a "portfolio holding").

A small company for these purposes means any entity engaged in an economic activity, irrespective of its legal form, which (i) employs fewer than 50 persons and whose annual turnover and/or annual balance sheet total does not exceed €10 million or (ii) which employs fewer than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed €2 million. Open-ended investment companies and authorised unit trust schemes are expressly excluded from the definition of small company.

Application to UK funds

Open-ended investment companies, unit trusts and investment trust companies (subject to not being a small company), should be able to benefit from the exemption most likely because the dividend or distribution is made in respect of ordinary shares or because the fund has a portfolio holding.