Case - Distributions from non-UK resident company were dividends

Recent Case: distributions from non-UK resident company were dividends

Introduction to Case

Generally, dividends from non-UK resident companies are charged to income tax. However, s.402(4) of ITEPA 2003 seems to suggest this does not apply to dividends of a capital nature.

This was considered in the recent case heard by The Upper Tribunal (UTT) of Beard v R & C Commrs (2024).

Background

• Mr Beard, was a shareholder of Glencore International PLC (‘Glencore’).
• Glencore was incorporated originally in Jersey, however, it had a domicile in Switzerland.
• Mr Beard received distributions from the company’s share premium account, between 2011/12 and 2015/16.  These distributions were of approx. £150m.
• According to Jersey Law, at the time distributions could be made from share premium accounts freely without having regard to the maintenance of capital. This would normally restrict the ability of shareholders from being able to demand a return on their shares, to protect the creditors of the company.
• The decision was originally made by the First-Tier Tribunal that the distributions received were dividends and taxable as income. This was later appealed.

Outcome

The ‘ordinary’ meaning of a dividend was considered by the tribunal. In the previous case of First Nationwide v R & C Commrs (2010), it was determined as a matter of English Law, via Companies Act 1948, that dividends could not be paid out of a share premium account.

However, this didn’t change the ordinary meaning of a dividend, but instead changed the meaning of distributable profit out of which a dividend could be paid, such that a distribution out of share premium account was still a ‘dividend’. 

It was then considered what the company was permitted to do under its governing law. Jersey Law allowed the share premium account to pay dividends.

The UTT agreed that the distributions provided by Glencore to Mr Beard fell within the ‘ordinary’ meaning of a dividend for English Law purposes, and there was nothing stated in Jersey Law to suggest the distribution could not be treated as fulfilling the English Law definition

The next consideration was whether those dividends were income, or of a capital nature, with the appellant arguing the latter.

In this debate, the UTT considered the following;

• Was the payment of income, or an authorised reduction of capital?
• Had the capital of the company remained intact post-distribution?
• What ‘mechanism’ was employed for the distribution of assets?

Conclusion

The UTT concluded that the distribution from the share premium account was not a payment of capital nature, as the company was not using a mechanism that covered a reduction in capital.

Given the high-value and significant tax implications of the distributions, this case highlights the importance of understanding the correct tax treatment for payments received from non-UK resident companies. Such clarity can facilitate proactive tax planning to avoid unexpected tax liabilities for yourself or your company's shareholders.

Next Step

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