The measure

Draft legislation has been released to address a problem which, in HMRC's view, can arise when a company pays certain dividends to another company. Near the end of 2009, HMRC started to take the view that amounts lawfully paid by companies as dividends, which arose from an earlier reduction of capital, might for corporate shareholders be taxable as a chargeable gain, rather than as an exempt dividend, as had previously been their view.

The existing rule that limits the application of the distribution exemption regime to distributions of an income nature will be removed.

The new legislation will also make clear that distributions made out of reserves arising from a reduction in capital are distributions which may fall within the dividend exemption.

Who will be affected?

UK companies in receipt of distributions which arose from an earlier reduction in capital.

When?

The removal of the rule that limits the application of the distribution exemption to distributions of an income nature will have effect for all distributions made on or after 1 July 2009.

The new legislation making clear that distributions made out of reserves arising from a reduction in capital are distributions which may fall within the dividend exemption will have full retrospective effect for distributions by UK-resident companies, and will apply to distributions made on or after 1 July 2009 by non-UK resident companies.