UK High Court decision concerns the portfolio dividend tax (holdings of less than 10%) under the previous tax law which provided double tax relief for foreign withholding taxes paid on the dividends and no relief for any underlying tax.

UK has moved to a system in recent years for giving unilateral double tax relief by exemption of foreign dividends. The High Court decision is however applicable to cases from the period before the change in the legislation those are still open.

The following are some implications of the High Court’s decision for taxpayers who may still be involved with similar cases:

• There is no need to obtain evidence for the taxpayers on the actual underlying tax paid and they can apply a credit for the notional rate of tax that is applicable in the country of dividend source. Otherwise, taxpayers may apply a credit for the actual underlying tax paid if greater.
• The notional rate to be applied is the rate in the distributing company.
• Usually, the applicable rate is the normal statutory or nominal rate of an overseas country. The rate is to be used even if the profits came from a source with a different rate.What rate is to be used in countries that apply a local trade tax as well as a corporation or federal tax (such as Germany) is ambiguous.The interpretation of the High Court indicates the rate of trade tax is also to be taken into account.
• Dividends are to be treated in the same way as EU dividends even if dividends received from companies based in third countries (i.e., outside the EU).
• Advance Corporation Tax was deducted at source once dividends from foreign sources were distributed and it had been practiced until 1999. The High Court held this was is only justifiable to the extent that the ACT made up for a lower notional rate of tax that these dividends had been subjected to compare with the UK nominal rate of tax of the UK resident company.