International Tax Newsletter - Spring 2011 - United Kingdom - DTAs and International Tax Proposals

  • A Double Taxation Agreement (DTA) between the U.K. and Qatar has been signed for the first time and takes effect generally from 1 January 2011 (or from 1 January 2004 in respect of profits, income and gains from shipping and air transport). The treaty generally follows the OECD model.
  • A protocol amending the U.K.-South Africa DTA was signed on 8 November 2010. South Africa has been changing its system of taxing dividends paid to nonresidents by abolishing its secondary tax on companies and introducing a withholding tax. The Protocol will amend the provisions of the DTA dealing with dividends to set limits to the withholding tax, as follows: 
    • 5% of the gross amount of the dividends if the beneficial owner is a company which holds at least 10% of the capital of the company paying the dividends
    • 15% of the gross amount of the dividends in the case of qualifying dividends paid by a U.K. resident real estate investment trust, or an equivalent entity resident in South Africa
    • 10% of the gross amount of the dividends in all other cases.
  • Measures are being consider as part of an interim improvement of the controlled foreign companies (CFC) regime which subjects the undistributed profits of subsidiaries of U.K. companies to U.K. corporation tax in certain circumstances. The improvements are expected to be implemented in 2011, before a more substantial set of reforms is enacted, scheduled for implementation in 2012. Broadly speaking, the Government would like to provide an exemption for foreign-to-foreign transactions where there is no erosion of the U.K. tax base (so called "commercially justified" activities). This could include a fullexemption for transactions involving intellectual property that clearly have no connection with, or impact on, the U.K. tax base. The Government also is considering, inter alia, extending the period of grace under which newly acquired subsidiaries are exempt from the existing rules and a relaxation of the requirement that a CFC must be effectively managed in its territory of residence to qualify for the Exempt Activities Test.
  • A U.K. dividend exemption regime has applied since 1 July 2009 such that, in most cases, U.K. resident companies and U.K. permanent establishments of foreign companies are not subject to tax on dividends received from U.K. and overseas companies. As originally worded, this exemption regime does not apply to distributions "of a capital nature". Changes may be introduced so that distributions of a capital nature (arising, for example, from a capital reduction) will be included within the exemption regime (with retroactive effect from 1 July 2009). However, this amendment will have no effect on the tax treatment of disposals, such as where a subsidiary repurchases share capital from its parent.

For further details, Hal Adrion of EisnerAmper LLP in New York can facilitate contact with Jon Hills of PKF (UK) LLP 

International Tax Newsletter - Spring 2011 

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