New foreign profits rules

From 1 July 2009, most dividends received by UK companies will be exempt from corporation tax.

For the first time this will include dividends held in overseas companies. The main exceptions to this exemption concern transactions with a tax avoidance motive, and should therefore be rare.

Connected with the dividend exemption are new rules which prevent groups from claiming a disproportionate amount of their interest expense as an allowable cost in the UK. In such cases, the level of interest that can be claimed in the UK will be restricted to the amount of interest paid to third parties by the worldwide group. The rules contain a number of exemptions, in particular to ensure that only the largest groups are caught by the rules.

If your UK company has overseas trades or subsidiaries you may need to review your position to ensure that the group is structured in a tax efficient manner. However, new Controlled Foreign Companies rules to be introduced in two years' time may mean that any restructuring decisions may need to be delayed until the landscape for overseas tax is clear.

The above package of measures is still in consulation form, and has been amended frequently since the Budget. We will provide detailed guidance when the legislation has been finalised.