But why? – Not the cry of every toddler, but why a relief is due – Andrew Parkes

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One of the real joys (and I’m not being sarcastic here) of working in International Tax is that what seems to be the simplest of questions can have the most hidden of answers.

The UK’s distribution exemption (i.e. dividends received from underlying subsidiaries are exempt from UK taxation) for small companies is only available where the paying company is resident in the UK or a qualifying territory (this is territory that has a double taxation agreement with the UK where the nondiscrimination article is based upon nationals, so does not include the Channel Islands, the Isle of Man or Hong Kong) and is not dual resident.

In our example, the paying company was incorporated in the BVI and resident in the UK via central management and control, so UK resident for the purposes of the distribution exemption. The question 7 though was whether it was also resident in the BVI. For these purposes, resident means liable to tax, and based upon this phrase in DTA’s, which we expect HMRC to use here, liable to tax means within the general charge to tax, even if exempted for some particular reason. For example, UK charities are liable to tax as they are UK companies, so within the UK’s tax net, and only exempt if they meet certain criteria.

BVI companies are, in fact, liable to tax, under their Income Tax Ordinance of 1946, but at a rate of 0%. The UK’s Distribution Exemption just requires liability – the rate of tax is immaterial. So, on the face of it, our BVI company will be considered dual resident for the Distribution Exemption and it will be denied.

However, this is not the end of the story, as the legislation is overridden by the BVI Business Companies Act, which provides a blanket exemption from the Income Tax Ordinance for any BVI company. This takes them outside of liable to tax, and within the Distribution Exemption!

The moral of this tale is that even when you have a tax query, the answer can be found in non-tax legislation.

If you have any queries regarding qualifying for the UK’s Distribution Exemption or other aspects of the UK’s international tax legislation, please contact Andrew Parkes.

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