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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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I own a UK trading company 50/50 with another shareholder.

Customer Question

I own a UK trading company 50/50 with another shareholder. The company is consistently making a net profit of £400k per annum but we disagree on how to invest the profit for the long-term. Neither of us wants to lose 40% of the profit by taking high dividends or salaries. Could we form two holding companies to own 50% of the trading company so that profits can be paid out as inter-company dividends? Thank you.
Submitted: 12 months ago.
Category: Tax
Expert:  bigduckontax replied 12 months ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

Pinsent Masons have the following advice regarding the tax treatment of inter company dividends within a company group which, from the scenario set out in your question, is the format which you presumably intend:

'Dividends received by the UK holding company from other UK companies or from overseas companies should benefit from an exemption from corporation tax, called the dividend exemption. If available this means that the UK holding company does not have to pay corporation tax on the dividends it receives.

Whether the UK holding company gets the benefit of the dividend exemption will depend on whether it is a 'small' company. Generally a company will be a small company if it has fewer than 50 employees and its annual turnover or annual balance sheet is less than €10 million. If there are any linked enterprises, such as subsidiaries of the holding company, their employees, turnover and balance sheet will need to be added to that of the UK holding company for the purposes of these limits.

If the holding company is a small company then the dividend exemption should prevent UK tax being payable in respect of dividends paid to it by UK companies or companies resident in most places where the UK has a double tax treaty, provided a few additional conditions are satisfied.'

Before 16/17 such dividends escaped taxation anyway as 'franked investment income.' The principle remains the same.

I do hope that you have found me reply of assistance.

Expert:  bigduckontax replied 12 months ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

Pinsent Masons have the following advice regarding the tax treatment of inter company dividends within a company group which, from the scenario set out in your question, is the format which you presumably intend:

'Dividends received by the UK holding company from other UK companies or from overseas companies should benefit from an exemption from corporation tax, called the dividend exemption. If available this means that the UK holding company does not have to pay corporation tax on the dividends it receives.

Whether the UK holding company gets the benefit of the dividend exemption will depend on whether it is a 'small' company. Generally a company will be a small company if it has fewer than 50 employees and its annual turnover or annual balance sheet is less than €10 million. If there are any linked enterprises, such as subsidiaries of the holding company, their employees, turnover and balance sheet will need to be added to that of the UK holding company for the purposes of these limits.

If the holding company is a small company then the dividend exemption should prevent UK tax being payable in respect of dividends paid to it by UK companies or companies resident in most places where the UK has a double tax treaty, provided a few additional conditions are satisfied.'

Before 16/17 such dividends escaped taxation anyway as 'franked investment income' which was outside the Copropeation Taxation (T) envelope altogether. The principle remains the same.

I do hope that you have found me reply of assistance.

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