Overseas dividends received by a UK company are now exempt from corporation tax in the same way as those received from a UK company. This headline proposal was announced in the budget on 22 April 2009 and followed more than two years of consultation and discussion.

There are many different ways in which overseas profits may be taxed and the UK’s chosen approach has been debated extensively over the years.

Patrick Hamilton, Bentleys tax expert said: “International trade is a vital part of the UK economy and fiscal incentives play a large part in maintaining the UK as a major trading hub. These proposals are merely the latest step along the path of achieving the UK Government’s stated aim of enhancing and supporting the competitiveness of the UK tax system. The proposed package is to be “balanced and affordable” and is not intended to represent a tax saving for a UK Company. As might be expected, the proposals are guarded by anti-avoidance legislation and what follows is intended as general guidance only. Specific advice should be sought in each situation.

There are various strands to the proposals, some of which will represent more of a saving for the UK tax payer than others and some that may prove costly in terms of compliance costs. The proposals cover:

• An exemption for dividends from UK corporation tax; 
• The abolition of the requirement to obtain a Treasury Consent for certain transactions and its replacement with a post-transaction reporting requirement; 
• The introduction of a worldwide debt cap that will restrict the amount of interest that can be deducted for corporation tax purposes in the UK; 
• An extension of the loan relationship anti-avoidance rules; and 
• Changes in the exemptions that currently take some overseas subsidiaries outside the scope of the controlled foreign company (CFC) rules in the UK.