A recent Court of Appeal decision has clarified the process for determining whether overseas dividends are income or capital in nature, which is determinate of how the recipient should be taxed in the UK. That said, both identifying and answering the key questions involved remains inherently complex.
In my experience, the tax treatment of distributions from overseas companies – particularly for corporates, though equally relevant to individuals – is often assumed, rather than properly analysed. The question of whether a distribution is income (typically exempt for CT purposes) or capital (potentially more complex) is frequently ‘assumed’.
While the vast majority of cases conclude that the receipt is income in nature, determining this properly involves several important considerations.
The recent case of Beard v HMRC [2025] EWCA Civ 385 (reported in Tax Journal, 9 May 2025) involved an individual who received £150m in distributions from a Jersey-incorporated company. The distributions, both cash and in-specie and with no relevance given to that distinction, were made from the company’s share premium account. The taxpayer contested the receipts should be characterised as being capital in nature and thus subject to a lower tax rate.
On first glance, this may seem reasonable. If this were a UK company, a similar payment (without a formal transfer to distributable reserves) would likely be treated as a return of capital. However, under the relevant Jersey law, distributions from the share premium account required no such conversion.
The leading tax case in this area prior to Beard is First Nationwide v HMRC [2010] UKFTT 24 (TC). It was held that in determining the character of a distribution, one must first classify it under the local law of the paying company’s jurisdiction, and then apply UK tax law accordingly.
As such, the approach involves:
Confirm the company should not be treated as transparent for UK tax purposes.
Determine whether the foreign law recognises a ‘corpus’ akin to share capital (what if that is freely distributable?).
Assess whether interests granted from that corpus are akin to ordinary shares.
Confirm the payment is being made in respect of those ‘shares’.
Consider whether the legal mechanism adopted in the overseas territory is analogous to a return of distributable profits or a return of that ‘corpus’.
If the only requirement is a solvency statement to protect creditors, the distribution may likely be income. But if the process goes beyond what’s required to distribute accrued profits, there is a greater risk of it being capital.
In Beard, the legal process mirrored that for profit distributions, so the court held it was income in nature, which appears correct.
Home >Articles > Dividends: income or return of capital?
Dividends: income or return of capital?
Clarification from the Court of Appeal.
A recent Court of Appeal decision has clarified the process for determining whether overseas dividends are income or capital in nature, which is determinate of how the recipient should be taxed in the UK. That said, both identifying and answering the key questions involved remains inherently complex.
In my experience, the tax treatment of distributions from overseas companies – particularly for corporates, though equally relevant to individuals – is often assumed, rather than properly analysed. The question of whether a distribution is income (typically exempt for CT purposes) or capital (potentially more complex) is frequently ‘assumed’.
While the vast majority of cases conclude that the receipt is income in nature, determining this properly involves several important considerations.
The recent case of Beard v HMRC [2025] EWCA Civ 385 (reported in Tax Journal, 9 May 2025) involved an individual who received £150m in distributions from a Jersey-incorporated company. The distributions, both cash and in-specie and with no relevance given to that distinction, were made from the company’s share premium account. The taxpayer contested the receipts should be characterised as being capital in nature and thus subject to a lower tax rate.
On first glance, this may seem reasonable. If this were a UK company, a similar payment (without a formal transfer to distributable reserves) would likely be treated as a return of capital. However, under the relevant Jersey law, distributions from the share premium account required no such conversion.
The leading tax case in this area prior to Beard is First Nationwide v HMRC [2010] UKFTT 24 (TC). It was held that in determining the character of a distribution, one must first classify it under the local law of the paying company’s jurisdiction, and then apply UK tax law accordingly.
As such, the approach involves:
Confirm the company should not be treated as transparent for UK tax purposes.
Determine whether the foreign law recognises a ‘corpus’ akin to share capital (what if that is freely distributable?).
Assess whether interests granted from that corpus are akin to ordinary shares.
Confirm the payment is being made in respect of those ‘shares’.
Consider whether the legal mechanism adopted in the overseas territory is analogous to a return of distributable profits or a return of that ‘corpus’.
If the only requirement is a solvency statement to protect creditors, the distribution may likely be income. But if the process goes beyond what’s required to distribute accrued profits, there is a greater risk of it being capital.
In Beard, the legal process mirrored that for profit distributions, so the court held it was income in nature, which appears correct.
.tmb-editorspic.jpg?sfvrsn=c9a7a0cc_1)
