How does the dividend exemption work in corporation tax?

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# Corporation Tax Dividend Exemption

## What the law says

### The Charge and Basic Exemption Structure

The charge to corporation tax on income applies to any dividend or other distribution of a company, **but only if the distribution is not exempt**. A distribution is exempt if it qualifies under either **Chapter 2** (small companies) or **Chapter 3** (companies that are not small) of **CTA 2009, Part 9A**.

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### Chapter 2 — Small Companies (s.931B)

A distribution received by a **small company** is exempt if all four conditions are met:

| Condition | Requirement |
|-----------|-------------|
| (a) | The **payer is resident only in the UK or a qualifying territory** at the time the distribution is received |
| (b) | The distribution is **not** a paragraph E or F distribution under CTA 2010 s.1000(1) (certain non-dividend distributions) |
| (c) | **No deduction** is allowed to a non-UK resident under foreign law in respect of the distribution |
| (d) | The distribution is **not made as part of a tax advantage scheme** |

A "qualifying territory" for this purpose means a territory with which the UK has double taxation arrangements containing a **non-discrimination provision**.

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### Chapter 3 — Non-Small Companies (s.931D)

A distribution received by a **non-small company** is exempt if:

- (a) it falls into an **exempt class** (ss.931E–931Q);
- (b) it is not a paragraph E or F distribution; and
- (c) no deduction is allowed to a non-UK resident under foreign law in respect of it.

The **exempt classes** for non-small companies include:

1. **Distributions from controlled companies (s.931E):** Exempt if the recipient controls the payer (Condition A), or if two persons together control the payer and the recipient holds at least 40% of the controlling interests (Condition B).

2. **Non-redeemable ordinary shares (s.931F):** Exempt if the distribution is made in respect of a share that is an ordinary share and is not redeemable.

3. **Portfolio holdings (s.931G):** Exempt if the recipient holds **less than 10%** of the issued share capital of the payer, is entitled to less than 10% of distributable profits, and would be entitled to less than 10% of assets on a winding up.

4. **Shares accounted for as liabilities (s.931I):** Exempt where a dividend is paid on a share to which s.521C does not apply only because the condition in s.521C(1)(f) is not met.

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### Anti-Avoidance

Several provisions remove the benefit of exemption where distributions are made as part of avoidance schemes:

- **s.931K** removes the s.931F (non-redeemable ordinary shares) exemption where a scheme is designed to make shares appear non-redeemable/ordinary when, taking all relevant persons together, they would not be.
- **s.931L** removes the s.931G (portfolio holdings) exemption where a scheme manipulates the holding below 10% when, aggregating all relevant persons, it would exceed 10%.
- **s.931N** removes any exempt class status where the distribution is part of a tax advantage scheme and a deduction is allowed to a non-UK resident by reference to the distribution.

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### Election Out of Exemption (s.931R)

A recipient may **elect for a distribution not to be exempt**. Such an election must be made on or before the **second anniversary of the end of the accounting period** in which the distribution is received.

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### Manufactured Dividends

Where a company receives a **manufactured dividend**, the Corporation Tax Acts apply as if it were a real dividend on the shares, meaning Part 9A can apply — but references to "the payer" are treated as references to the company paying the **real** dividend.

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## HMRC Guidance / Practice

HMRC confirms that Part 9A is **designed to ensure that the great majority of dividends and other distributions will be exempt**, with the charge to corporation tax applying only where exemption does not apply.

HMRC notes that Part 9A is structured across four chapters:
- Chapter 1: the charge (s.931A)
- Chapter 2: exemption for small companies (ss.931B–931C)
- Chapter 3: exemption for non-small companies (ss.931D–931Q)
- Chapter 4: interpretation, incidental rules, and the right to elect out of exemption (ss.931R–931W)

On the **election out of exemption**, HMRC notes that a company must elect for a dividend to be taxable (e.g. to use it as an ADP dividend for CFC purposes), and that a company **cannot split a single dividend** — the whole dividend must be made taxable.

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## Summary

The dividend exemption in corporation tax operates as a **default exemption**: most dividends and distributions received by UK companies are automatically exempt from corporation tax under CTA 2009, Part 9A. The key distinction is between **small companies** (which get a simpler, payer-residence-based exemption) and **non-small companies** (which must satisfy one of several exempt class tests). Anti-avoidance rules prevent manipulation of the exempt classes, and companies may elect out of exemption where commercially beneficial (e.g. for CFC relief purposes).

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Condition	Requirement
(a)	The payer is resident only in the UK or a qualifying territory at the time the distribution is received
(b)	The distribution is not a paragraph E or F distribution under CTA 2010 s.1000(1) (certain non-dividend distributions)
(c)	No deduction is allowed to a non-UK resident under foreign law in respect of the distribution
(d)	The distribution is not made as part of a tax advantage scheme