“Stock dividends”, if they are traditionally structured bonus issues, are neither dividends (since nothing leaves the company) nor capital reductions, but rather reflect a capital reconstruction.
Stock dividends as defined in the legislation are treated as income by virtue of S1049 CTA10 and, where undertaken by UK resident company, are taxable as savings income under S409 to S414 Chapter 5, Part 4 Income Tax (Trading and Other Income) Act 2005 (ITTOIA05).
However, there is no equivalent charge for stock dividend income from a non-UK resident company. Furthermore, the charging provision for dividends from non-UK resident companies (‘overseas dividends’) is quite different from the charging provision for UK dividends and other distributions at section 383 ITTOIA 2005. Section 402 ITTOIA 2005 is narrower, for example it excludes ‘dividends of a capital nature’.
This means that to be charged to Income Tax under S402 ITTOIA, something described as a “stock dividend” by a non-UK resident company would need to be a dividend of an income nature. It is the company law mechanism of payment that determines whether the payment is a ‘dividend’ or not (this is set out in more detail by the Court of Appeal in HMRC v First Nationwide. This case determined that whether an issue of share capital by an overseas company is chargeable to UK Income Tax, the primary question is whether the distribution is paid by a dividend mechanism. The dividend will only escape the charge to Income Tax if it is accompanied by a reduction in capital or paid in a liquidation). There is further guidance on the meaning of stock dividend at CTM17005, and a specific comment on ‘Dividend Reinvestment Plans’.
Applying this to the question raised here it is necessary to look at the exact mechanism being used to achieve any sort of “stock dividend” by a foreign company. If the transaction in question is a true “bonus issue”, then a SCRIP dividend will not give rise to a charge under section 402, ITTOIA 2005 for the reasons set out above – nothing has left the company and there has been no capital reduction. However, where alternative methods are used – such as the DRIP scheme you note in your query, it is possible that a dividend chargeable under section 402 has been received, but it always depends on the exact mechanism used in the particular jurisdiction.
CTM17005 - Distributions: stock dividends