MTT21140 | Calculating the effective tax rate: Adjusted profits: Excluded dividends

To determine the member’s adjusted profits, its underlying profits are to be adjusted to exclude any excluded dividends received or accrued by the member.

Certain types of distribution are exempt from the exclusion, unless they are distributions from a flow-through entity.

This adjustment is set out in section 141 of Finance (No.2) Act 2023.

Meaning of excluded dividend

An ‘excluded dividend’ is:

• a dividend or other distribution arising as a result of a qualifying interest in a flow-through entity, or

• any other dividend or other distribution arising as a result of a qualifying interest in an entity (except for those that are exempt from the exclusion).

See MTT41410 for guidance on the definition of flow-through entity.

An interest in an entity is a ‘qualifying interest’ if it is a direct ownership interest (see MTT17030).

Dividends and other distributions that are exempt from the exclusion

The following types of dividend and other distributions are exempt from the exclusion and therefore should not be treated as excluded dividends:

• those arising as a result of a qualifying interest that is a short-term portfolio holding.

• those arising as a result of a qualifying interest in an investment entity that is subject to a taxable distribution method election.

• those made by a member of the same group, if payments in respect of the distribution are treated as an expense of that member for the purposes of determining its underlying profits. (This is the case regardless of whether the distribution was accounted for as a distribution at the time of payment.)

• any other dividend or other distribution, to the extent it reflects debt rather than a qualifying interest.

Dividends or distributions of these types are not to be excluded from a member’s underlying profits, unless they arise as a result of a qualifying interest in a flow-through entity.

Portfolio holding

A qualifying interest in an entity held by a member of a group is a “portfolio holding” if, on the vesting date of the distribution, the group’s members do not, between them, have qualifying interests that entitle them to 10% or more of the entity’s profits, capital, reserves, and voting rights.

If the group’s members collectively are entitled to less than 10% of any of these, the qualifying interest will be a portfolio holding.

Short-term portfolio holding

A portfolio holding is a ‘short-term portfolio holding’ if it was held by the member for less than 1 year before the vesting date of the distribution. This assessment is made on a member-by-member basis, so where an ownership interest is transferred between group members, the period of time for which the previous member held the interest will not be considered.

The ‘vesting date’ of a distribution is the earlier of:

• the day it is made, and

• the day on which the person to whom it arises is entitled to have it made.

The group may elect to treat all portfolio holdings held by a member as short-term portfolio holdings. This is a long term election. See MTT52200 for guidance on elections.

Domestic Top-up Tax – dividend receivable from protected cell company by wholly domestic group or entity

A dividend or other distribution received or accrued by a wholly domestic group or entity from a protected cell company will be treated as an excluded dividend for DTT purposes.

See MTT10130 for guidance on protected cell companies.