HMRC’s consultation on distributions includes a proposal to scrap a long-standing difference in tax treatment between distributions from UK and non-UK tax resident companies, possibly with some unintended consequences. 

Current law

Under the current tax rules, income tax is charged on any “distribution” from a UK resident company and there are special rules that also apply to situations like stock dividends. There are detailed rules in Part 23 of Corporation Tax Act 2010 (CTA 2010) that determine what is a “distribution”, but in broad terms the definition captures any return of value from a company in excess of the amount subscribed for its shares.

For shareholders in non-UK resident companies, though, the position is quite a bit simpler: income tax is charged on “dividends”, other than dividends of a capital nature (s. 402 of Income Tax (Trading and Other Income) Act 2005 (ITTOIA)). Although this concept has been the subject of litigation with HMRC in the past (most recently the Court of Appeal decision in Alexander Beard v HMRC [2025] EWCA Civ 385), it is generally well understood. Start with the mechanism used to make the payment under the relevant foreign law and then apply the UK law concepts of income / capital to that mechanism.

This different test for distributions from non-UK resident companies means that certain types of returns of capital, share repurchases and stock dividends (for which there are separate but similar rules) may all be taxed at least in part as income from a UK resident company, but capital from a non-UK resident company.

This difference has been present in the UK tax code for many decades and was deliberately preserved when the provision was re-enacted as s. 402 ITTOIA as part of the Tax Law Rewrite Project. There are practical reasons why this different treatment remains in the current rules, which are to some extent raised in the consultation and explored below.

The proposed changes

The government broadly proposes to apply the existing “distribution” rules to distributions from non-UK resident companies so that they are taxed in the same way as from UK resident companies. According to the consultation, the current differences “can incentivise businesses to utilise non-UK resident companies rather than UK resident companies and to extract money in forms other than dividends”.

The definition of a “distribution” is set out in s. 1000(1) CTA 2010, which includes different categories of distribution labelled from “A” to “H”. There are then a number of different rules throughout Part 23 CTA 2010 that adjust these basic categories in certain scenarios. The government proposes to extend the income tax charge in ITTOIA to A, B, G and H distributions, which broadly covers:

• all dividends (not just dividends of an income nature) (A)
• all other distributions out of the assets of the company in respect of shares (other than repayments of capital or distributions for consideration) (B)
• transfers of assets or liabilities between the member and the company (G)
• certain bonus shares issued after a share buyback (H)

Stock dividends would also be covered separately.

The government is also consulting on whether to extend the income tax charge to C, D, E and F distributions as well. The reasons for not necessarily including these in the current scope are:

• C and D distributions address issues of redeemable and bonus shares (where the issue itself can be a distribution, rather than a redemption / repurchase of those shares). The concern is that it may be difficult to identify under the relevant foreign law what the precise nature of a share is and whether it falls into these categories.
• E and F distributions relate to interest on debt with equity characteristics and cover things like interest that exceeds a “reasonable commercial return” and interest that varies depending on the business performance of the issuer. Although the application of E and F distributions does change the character of the payment in the hands of the recipient (i.e. a distribution rather than interest), their main function is to disallow UK interest deductions for the borrower to the extent that the interest is treated as a distribution, which would not be relevant for non-UK resident companies.

Problems with the proposal?

The consultation document then goes on to consider the two main practical difficulties, which are likely part of the reason that dividends from foreign companies are taxed differently in the first place.

Different foreign company law

The first is the fact that the UK rules on distributions are drafted mainly with UK company law in mind. For example, the concept of a “repayment of capital”, which appears throughout Part 23 and is generally not treated as a distribution, is relatively clear in a UK context, but may not be so in jurisdictions with a different approach to share capital. Similarly, all “dividends” are treated as a category “A” distribution – again that works in a UK context where a dividend almost be definition cannot overlap with a repayment of capital, but that is not necessarily true in other jurisdictions.

There will no doubt be other issues in applying UK law to foreign distributions that are not mentioned in the consultation. For example, the consultation itself identifies issues with classifying bonus and redeemable shares in relation to category C and D distributions (as noted above), but historic issues of bonus shares may also be relevant to determining how much “capital” a company has when considering if a particular repayment constitutes a “repayment of capital” for category “B” distributions. 

The consultation includes a number of questions and suggestions about amending these provisions to make the law clearer and, for example, to deem certain payments to be distributions if certain factors are present. But what these changes might look like in practice is unclear at present. 

Lack of shareholder information

The second issue is a lack of information for UK shareholders in non-UK resident companies. UK resident companies, particularly listed companies, are generally required to communicate to shareholders how much of a given payment constitutes a distribution under UK law. As a result of the complexities of the distributions code, it is often not possible for shareholders to determine this themselves, as it requires a knowledge of (for example) share premium paid on previous share subscriptions. For non-UK resident companies, that information may simply not be available to UK shareholders.

The consultation proposes that, in such a case, the shareholder can calculate how much of any given payment is a repayment of capital by reference to the nominal value of the shares as long as the shareholder reasonably believes that the shares have been fully paid up. Although that is a solution for the lack of information, it clearly leaves the shareholder worse off as it ignores (for example) any share premium that would otherwise also form part of the share capital.

Commercial practice

In addition, for transactions like share buybacks, these are usually effected for UK companies on public markets by a broker buying the shares on-market (as principal, not agent for the company) and selling them separately back to the company. The result is that there is no distribution to individual shareholders because they simply sell their shares to a broker just as if they were selling their shares to any other market purchaser. That is not necessarily the case for non-UK companies, which do in some circumstances buy back shares directly – this would result in an income tax charge under current proposals, where the UK equivalent does not.

Aligning the income tax treatment of distributions from UK and non-UK companies is therefore not as simple as it might appear, particularly if the aim is to achieve parity in all commercially similar scenarios. 

See our Distributions Consultation Series 2026 for posts looking at other aspects of the consultation.