 Capital distributions - Budget 2010
In a welcome move, the Government has clarified the corporation tax treatment for companies in receipt of capital distributions. A 'distribution of a capital nature' is not clearly defined and depends, in many circumstances, on interpretations laid down by case law. Also, in the case of a distribution being made by a foreign company, the construction of local company law can also make the distinction less clear. However one can broadly consider that a return of capital, such as the distribution of assets upon the liquidation of a company, will be a capital distribution.
The distinction became important as a result of changes in Finance Act 2009 which provided for an exemption for UK companies on receipt of dividends from foreign companies in certain circumstances.
This exemption, as originally drafted, did not extend to capital distributions.
In a retrospective move, a dividend received by a UK company on or after 1 July 2009 will now not be denied the exemption purely because it is capital in nature.
There has also been welcome clarification that distributions out of reserves created following a reduction of capital will also qualify as a distribution under the dividend exemption. For income tax purposes, such distributions will be taxed on an individual as income from 22 June 2010 where the distributing company is UK resident.
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