European FII ruling may see HMRC pay-outs

A RULING on franked investment income handed down by the European Court of Justice could put an end to double taxation that UK companies with overseas subsidiaries had been experiencing on foreign-sourced dividends.

Previously, a UK company which received a dividend from another UK business was exempt from corporation tax on the dividend. However, a dividend from a non-UK company, in particular from the EU, was liable for corporation tax.

That was ruled unlawful by the ECJ in 2006 – confusion over the scope of that decision saw the issue bounce between UK courts and Europe. The latest ruling means that businesses could now be repaid on their overpayments.

The verdict also means overseas subsidiaries further down the corporate chain are covered by the ruling.

KPMG head of tax policy Chris Morgan said that overpayments on advance corporation tax have already been refunded, but a further ruling on a separate case will determine whether additional refunds we be paid as far back as 1973.

Pay-outs, however, can be expected on taxed dividend overpayments, provided they were sourced from countries with a lower tax rate.

He said: "As regards advance corporation tax, the claimants have effectively been making an interest free loan to the Exchequer. The court has confirmed this must be repaid. As regards dividend taxation, the court has agreed that the UK was entitled to top any foreign tax paid to the UK rate but had to give full credit for foreign tax at the foreign rate."