HMRC loses Court of Appeal case on foreign dividend tax credits

The Court of Appeal has ruled in favour of the taxpayer, Prudential, in a case considering the treatment of foreign dividends received by UK companies prior to July 2009 (when the law changed to exempt both UK and overseas dividends in most circumstances). 

The case dates back to 2013, when the High Court considered whether the correct approach was to exempt foreign dividends from taxation in the hands of a UK corporate recipient, mirroring the treatment applying to UK dividends, or to allow an enhanced foreign tax credit equal to at least the foreign tax paid in the jurisdiction, in which the company paying the dividend was resident.

The Court held that the latter approach was to be preferred, with the UK company being able to claim a foreign tax credit equal to the higher of the tax actually paid on the underlying profit or the nominal rate of tax of the paying company, in both cases capped at the UK rate, in addition to any withholding taxes. HMRC’s argument that it should not be forced to refund tax paid – in some cases many years ago – under the law as it was then believed to apply was rejected on the grounds that this defence did not apply to taxes collected in contravention of EU law.

HMRC appealed against the decision to the Court of Appeal, and yesterday the judge, Lord Justice Lewison, upheld the previous ruling. It remains to be seen whether HMRC will take a further appeal to the Supreme Court.