U.S. taxation of U.K. dividends.

• Author: Hornsby, Brian
• Position: Brief Article

In addition to the normal sources of U.S. tax law dealing with the U.S. foreign tax credit (FTC) rules, certain other matters need to be considered when determining the U.S. tax effect of dividends received from the United Kingdom.

For example, Articles 10(2)(a)(iii) and 23(1) of the U.K.-U.S. Tax Treaty provide that for U.S. income tax/FTC purposes: * Any advance corporation tax (ACT) refund paid to a U.S. investor is to be treated as an additional dividend. * The 5% or 15% withholding tax deducted from an ACT refund will be treated as an income tax imposed on the dividend's recipient. * For a direct corporate investor receiving only a one-half ACT refund, the unrefunded half of the ACT will be treated as an income tax imposed on the recipient. See the example above.

The views of the IRS and the U.S. courts on the taxation of U.S. dividends are also set out, inter alia, in The U.S. Treasury Explanation of the U.K./ U.S. Tax Treaty, originally issued in March 1977; Rev. Proc. 80-18, as clarified and amplified by Rev. Proc. 90-61; and in Xerox Corp., Cl. Ct., 1988.

Certain key points should be noted. * For a direct corporate investor...