Foreign Stock Dividends - Income or capital?

Our broker has advised that a foreign stock dividend should be reported as income on the SA return, But the SA106 Guidance notes say Do not include: ... • stock dividends or bonus shares from a stock dividend issue made by a foreign company After chasing through the various Manuals I find CG51823 which says that foreign stock dividends should be treated as nil-value acquisitions i.e. a potentially CGT-liable item, not income tax. Is our broker wrong?

Hi,

Foreign stock dividends are taxable as dividends in the UK and should be reported in a Self Assessment tax return on SA106. If foreign tax was deducted from the dividends, you can claim Foreign Tax Credit Relief.

If you sell the stock dividends, you could be subject to Capital Gains Tax, which would also be shown on SA106. If foreign Capital Gains Tax was deducted from the disposal, you can claim Foreign Tax Credit Relief.

Thank you.

 

So why does the SA106 guidance say Do not include: ... • stock dividends or bonus shares from a stock dividend issue made by a foreign company

Hi,

Stock dividends as defined in the legislation are treated as income, so should not be included as dividends from a foreign company box. You can see guidance here: 

SAIM5150 - Dividends and other company distributions: stock dividends: introduction

Thank you.
 

I had read that. It, and the legislation it refers to, specifically states UK companies, not foreign companies. Quote: Meaning of ‘stock dividend income’ ITTOIA05/S409 imposes a tax charge on ‘stock dividend income’. ITTOIA05/S410 defines ‘stock dividend income’ as arising if a UK resident company issues share capital in the following circumstances: as a result of the shareholder exercising an option to choose whether to receive an ordinary cash dividend or additional share capital (CTA10/S410(1)(a)), or in respect of shares which, under their terms (whether original or otherwise), carry the right to bonus share capital (CTA10/S410(1)(b)). So the SA106 Guidance is correct in saying they should not be included - yes?

Hi,

Please refer to the following clarification of HMRC's position on foreign stock dividends:                                                                      

“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 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 below, and a specific comment on ‘Dividend Reinvestment Plans’.

CTM17005 - Distributions: stock dividends: introduction

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.

Thank you.
 

so if a foreign company said to "exit its investment" and distribute their share instead of paying cash, is this mean "return of capital" ?

Hi
I would refer you again to the clarification provided below of HMRC's position on foreign stock dividends.
Given the complexity of this area of taxation, Customer Forum advisors are unable to provide any further guidance.             
“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 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 below, and a specific comment on ‘Dividend Reinvestment Plans’.
CTM17005 - Distributions: stock dividends: introduction
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.