ACCA Advanced Taxation (ATX) Practice Exam

Are overseas dividends exempt from corporation tax?

1. True

2. False

3. Only if they are reinvested

4. Only for certain countries

The correct answer is: True

Overseas dividends received by UK companies are exempt from corporation tax under certain conditions laid out in the UK's participation exemption. This exemption applies when the foreign dividend is received from subsidiaries where the UK company holds at least 10% of the share capital, and the subsidiary is not a 'tax-avoidance arrangement.' This participation exemption encourages UK companies to invest overseas without incurring additional tax liabilities on the income they receive from these investments. It is important to note that the exemption applies broadly to dividends received from foreign subsidiaries, thereby providing a significant benefit to UK companies engaging in international business operations. Regarding the other options, while there are specific rules and guidelines governing the exemptions, the general principle remains that overseas dividends are, in principle, exempt, provided they meet the participation exemption criteria. Thus, it is crucial for companies to ensure that they understand the qualifying conditions to benefit from this tax relief.