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Tax on foreign scrip dividends?

Tax | Income Tax Helpful? 7

Asked by rogerwgoddard, submitted 29 July 2012.

Open Quote I have Royal Dutch Shell shares from I take scrip dividends.

As far as I have been able to find out no income tax is due on the scrip dividend, that is used to purchase new shares. There is a 15% Dutch withholding tax on the conventional dividends.

I called HMRC tro try and check the tax position and they seemed confused...before hanging up.

How are they taxed, is there a catch?
End Quote

Answered by Justin on 17 September 2012

There's no catch as such.

Like most companies, Royal Dutch Shell pays corporation tax on its profits, with dividends paid out of the remaining balance. If you opt for scrip dividends (i.e. extra shares in lieu of a cash payout) there's no 15% Dutch withholding tax, as you mention. Opt for cash dividends and the withholding tax applies.

Whichever route you choose, the dividends are subject to UK income tax as normal. This means basic rate taxpayers will have no further liability (as the corporation tax paid is effectively deemed to be sufficient) and higher rate taxpayers will be subject to 32.5% tax on the 'gross' dividend (generally equal to 25% of the dividend received).

The 15% Dutch withholding tax can be offset against the UK income tax liability, but as basic rate taxpayers don't have any further liability it's only relevant to higher/top rate taxpayers.

So in this case the scrip dividend is more favourable for basic rate taxpayers (as it avoids the 15% withholding tax that can't in practice be reclaimed) while neutral for higher/top rate taxpayers (assuming they reclaim the 15% when opting for conventional dividends).

If you want to read about scrip dividends and capital gains tax see my answer to this previous question.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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