ACCA Advanced Taxation (ATX) Practice Exam

How does the payment of dividends impact the installment payment threshold for an overseas subsidiary?

1. Only associated company dividends are counted

2. No impact on payment structure

3. Dividend income raises UK tax liability

4. Non-associated company dividends must be included in profits

The correct answer is: Non-associated company dividends must be included in profits

The payment of dividends from non-associated companies must be included in the profits of an overseas subsidiary when assessing the installment payment threshold. This inclusion is important because it directly affects the calculation of taxable profits, which in turn influences whether the company meets the criteria for making installment payments for corporation tax. Essentially, any income that contributes to the profits of the subsidiary, including dividends from non-associated entities, alters the overall profit calculation and can affect cash flow considerations for tax payments. Including dividend income from non-associated companies ensures a comprehensive understanding of the subsidiary's financial situation. If these dividends generate significant income, they could elevate the subsidiary's profits to exceed the threshold that dictates the installment payment requirements, changing the tax obligations for the company accordingly. This inclusion reflects the tax regulations that aim for all income sources to be considered when determining tax liabilities and payment structures. In contrast, the other options do not accurately capture how dividend payments interact with the considerations for the installment payment threshold. For example, it is not just associated company dividends that impact this threshold, and claiming there is no impact on the payment structure overlooks the essential role dividend income plays in profit calculations. Similarly, stating that dividend income raises UK tax liability does not directly relate to how these dividends affect the payment of tax installments