On 25 April 2019 HMRC updated the list of territories that it considers to have an appropriate non-discrimination provision in their tax treaties with the UK. Hong Kong, the Falkland Islands and the Faroe Islands were removed from this list.

This has a significant impact on small companies receiving dividends from companies based in those three territories.

If your company has a maximum of 50 staff, and either a turnover of less than €10m or assets of less than €10m, then dividends received from Hong Kong, Falkland Islands and Faroe Islands are no longer exempt from Corporation Tax. In some circumstances it is possible that credit can be claimed against the UK tax liability for overseas tax suffered on the profits out of which a dividend has been paid but this is not always the case.

Other issues

This change also will have an impact on the following points:

• Transactions with Hong Kong, Falkland Islands and Faroe Islands cannot benefit from the Small and Medium Enterprises exemption from the UK’s transfer pricing rules.
• There is no exemption from Withholding Tax on interest for qualifying private placements paid to Hong Kong, Falkland Islands and Faroe Islands based lenders.
• Hong Kong, Falkland Islands and Faroe Islands are not exempt territories for the purposes of the UK Income Tax on Offshore Receipts legislation.

Next steps

If you think these changes will impact you, please get in touch with a member of our Corporate Tax or International Tax teams.

For comparison, as at 1 August 2019, €10m is approximately £9.15m. This conversion may change and is for illustrative purposes only.