UK Tax and Withholding Tax Explained
Foreign-owned UK subsidiaries often distribute profits to their overseas parent company through dividends.
The good news is that ordinary dividends paid by a UK company to a foreign parent are generally not subject to UK withholding tax.
However, the UK subsidiary must still have sufficient distributable profits and follow the appropriate company law and accounting procedures. The foreign parent may also need to consider tax on the dividend in its own country.
Can a UK Subsidiary Pay a Dividend to a Foreign Parent?
Yes.
A UK subsidiary can generally pay a dividend to its overseas parent, provided it has sufficient profits available for distribution.
For example:
Foreign Parent → 100% ownership → UK Subsidiary
If the UK subsidiary has accumulated distributable profits, it can potentially declare a dividend to its foreign shareholder.
The parent’s country of residence does not, by itself, prevent the UK subsidiary from paying the dividend.
Is UK Withholding Tax Charged on Dividends Paid Overseas?
Generally, no.
The UK does not normally impose withholding tax on ordinary dividends paid by UK companies, including dividends paid to non-UK resident shareholders.
This is an important distinction from other cross-border payments.
| Payment | UK withholding tax |
| Ordinary dividend | Generally no |
| Interest paid overseas | May apply |
| Certain royalties | May apply |
| Certain annual payments | May apply |
Therefore, a UK subsidiary will generally be able to pay an ordinary dividend to its foreign parent without deducting UK withholding tax.
The UK Subsidiary Must Have Distributable Profits
Although there is generally no UK withholding tax, the company must still comply with UK company law.
A dividend can generally only be paid from profits available for distribution.
Having cash in the bank is not enough.
For example:
- Cash in bank: £500,000
- Distributable reserves: £300,000
The company cannot simply assume that it can distribute the full £500,000.
The distributable reserves should be established from the company’s accounts and relevant financial records.
Corporation Tax and Dividends
A dividend is a distribution of profits, not a business expense.
The UK subsidiary pays Corporation Tax based on its taxable profits. It can then distribute available post-tax profits to its shareholder.
The dividend itself is not normally deductible for Corporation Tax purposes.
For example:
UK taxable profit → Corporation Tax → remaining profits → dividend to parent
The dividend therefore does not reduce the subsidiary’s taxable trading profit.
Does the Foreign Parent Pay UK Tax?
Generally, the foreign parent does not become subject to UK Corporation Tax simply because it receives a dividend from its UK subsidiary.
However, the parent company should consider the tax treatment of the dividend in its country of residence.
Depending on the jurisdiction, the dividend may be:
- Exempt from tax;
- Subject to local corporate tax; or
- Eligible for a participation exemption or other relief.
The UK and foreign tax treatments should therefore be considered separately.
Dividend vs Interest
Foreign-owned UK companies should not confuse dividends with intercompany interest.
Dividend
A distribution to the shareholder from available profits.
UK withholding tax: generally none.
Interest
A payment under a financing arrangement.
UK withholding tax: may apply.
For example, if a foreign parent lends £1 million to its UK subsidiary, interest paid on that loan may trigger UK withholding tax considerations.
The correct treatment depends on the specific circumstances and any applicable tax treaty.
Dividend vs Management Fee
A payment to a foreign parent is not automatically a dividend simply because the companies are in the same group.
If the foreign parent provides genuine services to the UK subsidiary, such as management or administrative services, the payment may instead be a management fee.
That payment can have different:
- Corporation Tax
- VAT
- Transfer pricing
- Withholding tax
considerations.
The transaction should therefore be classified according to its actual legal and commercial nature.
Practical Example
A UK subsidiary is 100% owned by a foreign parent.
At year-end, the UK company has:
- £600,000 of distributable profits
- £400,000 cash available
The directors determine that £250,000 can be distributed.
The company declares a £250,000 dividend to the foreign parent.
For an ordinary UK dividend:
Dividend: £250,000
UK withholding tax: generally £0
Amount paid to parent: £250,000
The UK company should retain appropriate dividend documentation and the foreign parent should consider the tax treatment in its own jurisdiction.
Common Mistakes
Paying a dividend without checking distributable reserves
Cash availability does not automatically mean that a dividend can legally be paid.
Treating dividends as a deductible expense
Dividends are distributions of profits and are not normally deductible for Corporation Tax.
Assuming every overseas payment is a dividend
Interest, royalties and management fees have different tax rules.
Ignoring the foreign parent’s tax position
No UK withholding tax does not necessarily mean the dividend is tax-free overseas.
Failing to document the dividend
Board records, dividend vouchers and supporting accounts should be retained.
Dividend Checklist
Before paying a dividend to a foreign parent, check:
- Sufficient distributable profits are available
- The dividend is properly approved
- Relevant accounts support the distribution
- A dividend voucher is prepared
- The payment is correctly recorded in the accounts
- UK withholding tax has been considered
- Any special distribution rules have been considered
- The foreign parent’s local tax treatment has been reviewed
Frequently Asked Questions
Can a UK subsidiary pay dividends to a foreign parent?
Yes, provided the UK subsidiary has sufficient distributable profits and follows the relevant legal requirements.
Is UK withholding tax charged on dividends paid overseas?
Generally no. Ordinary UK dividends are normally paid without UK withholding tax.
Can dividends be paid from retained earnings?
Yes, provided the retained earnings represent profits legally available for distribution.
Are dividends deductible for UK Corporation Tax?
No. Dividends are distributions to shareholders rather than deductible business expenses.
Does the foreign parent pay UK tax on the dividend?
Generally not simply because it receives a dividend from a UK subsidiary. The parent company’s local tax rules should be considered separately.
Conclusion
A UK subsidiary can generally pay dividends to its foreign parent, and ordinary UK dividends are normally not subject to UK withholding tax.
The key points are:
- The UK subsidiary must have sufficient distributable profits.
- The dividend is not normally deductible for Corporation Tax.
- Ordinary UK dividends are generally paid without withholding tax.
- The foreign parent should consider the tax treatment in its own country.
- Dividends should not be confused with interest, royalties or management fees.
- Proper corporate and accounting documentation should be maintained.
For foreign-owned UK companies, checking the distributable reserves and documenting the dividend correctly is essential before transferring profits to the overseas parent.
How FKGB Accounting Can Help
FKGB Accounting works with foreign-owned UK subsidiaries and international groups on Corporation Tax, accounting, intercompany transactions and dividend distributions.
To discuss your UK operations, book a meeting through our online calendar or contact us by email for a confidential consultation: David.levy@fkgb.co.uk
All the best
