The UK has become an attractive destination for inward investment by providing tax breaks for UK holding companies of both domestic and foreign groups. 

Two important exemptions are available for UK resident companies holding participations in other companies:

  1. The Substantial Shareholdings Exemption (SSE) which broadly allows UK companies to dispose of >10% trading subsidiaries free of tax after a 12-month holding period.  A separate briefing note provides further details on this exemption.
  1. A full participation exemption system which removes most dividends received by UK companies from the charge to corporation tax, including those received from most foreign jurisdictions.


The legislation is drafted in the negative – i.e. all dividends, UK and foreign, are deemed to be subject to tax unless they fall into an exempt category.  The rules for exemption differ between dividends received by “small” groups, and those received by large groups.

It should be noted that there is no general exemption from tax on UK dividends received.  Companies will therefore need to ensure that distributions received from UK companies also fall into one of the exempt categories.

It should also be emphasised that the effect of the dividend exemption regime is that the vast majority of all dividends received by companies in the UK will not now be subject to UK corporation tax.

Small Groups

Defined as:-

  • Less than 50 employees, and
  • Turnover below €10M, or
  • Balance sheet total below €10M

For small groups, a dividend will be exempt if all the following conditions are met:

  • The payer is resident in the UK or a qualifying territory
  • The dividend is not, in fact, a payment of interest which is treated for tax purposes as a dividend
  • The dividend is not tax deductible in the paying jurisdiction
  • It is not part of a scheme, the main purpose of which is to secure a tax advantage.  This would seem to apply where, for instance, UK profits are artificially diverted overseas only to be subsequently repatriated as dividends.

A qualifying territory is one with which the UK has a double tax agreement which includes a non-discrimination article.  The effect of this will be broadly to exclude dividends received from traditional tax havens.

Large Groups

For large groups, a dividend will be exempt if:

  • It falls within one of the five exempt classes listed below
  • The dividend is not, in fact, a payment of interest which is treated for tax purposes as a dividend
  • The dividend is not tax deductible in the paying jurisdiction

The exempt classes of dividends for large groups are as follows.  A dividend need only fall into one class:

  1. Dividends from any company controlled by the recipient – i.e. 51% subsidiaries.  Almost all dividends from subsidiaries will fall into this class.
  2. Dividends paid in respect of non-redeemable ordinary shares – i.e. ordinary shares where neither the issuer or shareholder can call for redemption
  3. Portfolio dividends – where the shareholding is less than 10%.
  4. Any dividend received where it has been paid out of profits which have not been diverted from the UK.  Most dividends from UK companies will satisfy this test if they do not fall into one of the other exempt categories.
  5. Shares treated as loans (i.e. those which fall within the “disguised interest” rules).  As “distributions” from such shares will be taxed as interest, they will not also be taxed as dividends.

There are detailed anti-avoidance rules which will also need to be considered in connection with the above which are aimed at particular avoidance schemes.