Most dividends a UK company receives are exempt from Corporation Tax. Part 9A of the Corporation Tax Act 2009 exempts distributions from both UK and overseas companies, but a small company only gets the exemption if the payer is resident in the UK or a qualifying treaty territory, and a larger company must fit each dividend into one of five exempt classes. A company can also elect to have an otherwise exempt dividend taxed.

Are dividends received by a company taxed at all?

Section 931A of the Corporation Tax Act 2009 (CTA 2009) brings any dividend or other distribution within the charge to Corporation Tax on income, but only if the distribution is not exempt. The exemption rules were introduced by Finance Act 2009 for distributions made on or after 1 July 2009 and they apply to distributions from UK and foreign companies alike. HMRC’s International Manual at INTM651010 explains that Part 9A originally covered only income distributions; Finance (No. 3) Act 2010 extended it to distributions of a capital nature as well.

HMRC describes the regime at INTM651020 as designed so that the great majority of dividends and other distributions will be exempt. The structure is simple once you see it:

  • Chapter 2 (sections 931B and 931C) sets the conditions for small companies.
  • Chapter 3 (sections 931D to 931Q) sets the conditions for every other company, built around five exempt classes and a set of anti avoidance rules.
  • Chapter 4 (sections 931R to 931W) contains definitions and the right to elect out of exemption.

This is quite different from how individual shareholders are taxed. An individual pays Income Tax on dividends above the dividend allowance (see dividend allowance and tax rates); a company usually pays nothing on the same dividend. That difference is one reason investment and holding structures, such as family investment companies, are used.

What counts as a small company for the exemption?

The test is not the Corporation Tax small profits rate and not the Companies Act size thresholds. Section 931S defines a small company by reference to the European Commission Recommendation 2003/361/EC: a company is small in an accounting period if it is a micro or small enterprise in that period. HMRC’s guidance at INTM652060 sets out the ceilings:

Test Ceiling for a small enterprise
Staff headcount Fewer than 50
Annual turnover Not exceeding €10 million
Balance sheet total Not exceeding €10 million

A company must meet the headcount test and at least one of the two financial tests. Three points catch people out:

  • Linked and partner enterprises are counted. Figures of linked enterprises are aggregated, so a tiny subsidiary of a large group is not small.
  • Balance sheet total means gross assets, not net assets.
  • Status changes slowly. HMRC says that generally a company crossing a threshold does not change status until the position is repeated for a second consecutive year. Figures for periods that are not a year long are annualised.

Under section 931S(2) some companies are never small for Part 9A, whatever their size: open ended investment companies, authorised unit trust schemes, insurance companies and friendly societies.

When is a dividend received by a small company exempt?

Section 931B gives four conditions, all of which must be met:

  1. The payer is resident in (and only in) the UK or a qualifying territory when the distribution is received.
  2. The distribution is not of a kind within paragraph E or F of section 1000(1) of the Corporation Tax Act 2010, which treat certain interest and other returns on securities as distributions.
  3. No deduction is allowed to a resident of any territory outside the UK, under the law of that territory, in respect of the distribution.
  4. The distribution is not made as part of a tax advantage scheme.

A qualifying territory, under section 931C, is one with which the UK has double taxation arrangements that contain a non discrimination provision. HMRC keeps the list at INTM412090. Regulations take out of the definition companies that the treaty itself denies benefits to; INTM652020 gives examples such as companies established under the International Business Companies legislation of Antigua and Barbados and persons carrying on offshore business activity in Labuan, Malaysia. A dividend from such a company is taxable in the hands of a small company.

On the tax advantage condition, INTM652040 says a scheme is not caught if the advantage is negligible, but that the term implies a low threshold and only in exceptional circumstances would an advantage of more than £10,000 be treated as negligible.

How do larger companies qualify for exemption?

For a company that is not small, section 931D requires the distribution to fall into an exempt class, not to be an E or F type distribution, and not to attract a foreign tax deduction for anyone. HMRC lists the five exempt classes at INTM653020:

  • Controlled companies (section 931E). The recipient controls the payer, or is one of two persons who together control it, where the recipient has at least 40% of the relevant holdings, rights and powers and the other person has at least 40% but no more than 55%.
  • Non redeemable ordinary shares (section 931F). This covers most ordinary dividends.
  • Portfolio holdings (section 931G). The recipient holds less than 10% of the issued share capital of the relevant class and would be entitled to less than 10% of the distributable profits and less than 10% of the assets on a winding up.
  • Transactions not designed to reduce tax (section 931H). The distribution is paid out of profits that do not derive from transactions with a main purpose of achieving a more than negligible reduction in UK tax.
  • Shares accounted for as liabilities (section 931I).

Only one class needs to apply. Anti avoidance rules in sections 931J to 931Q can switch off a class, for example where a scheme manipulates the control test to pay out profits earned before control was acquired, or where a holding of 10% or more is split between connected companies to fit the portfolio class. Because the class rules are broad, the practical work for larger companies is usually confirming that none of the anti avoidance rules is in point.

Why would a company elect for a dividend to be taxable?

Section 931R lets a recipient elect that a distribution which would otherwise be exempt is not exempt. The election must be made on or before the second anniversary of the end of the accounting period in which the distribution is received. HMRC’s guidance at INTM655010 gives the usual reason: some double tax treaties only reduce the foreign withholding tax on a dividend if the dividend is subject to tax in the UK. Paying UK tax, with credit for the foreign tax, can then cost less than suffering the full foreign withholding.

INTM655010 also explains the mechanics. Once HMRC has issued a notice to deliver a return for the period, the election can only be made in the return. The election does not need to be quantified but must identify the distributions clearly, and it can be framed to cover future periods until revoked, for example all dividends from a named territory.

Do exempt dividends still affect the Corporation Tax rate?

Yes, and this is the effect most often missed. Section 18L of the Corporation Tax Act 2010 defines augmented profits as taxable total profits plus exempt distributions of a qualifying kind. Augmented profits decide whether the small profits rate, marginal relief or the main rate applies. For the financial year beginning 1 April 2026 the small profits rate is 19% for profits under £50,000, the main rate is 25% for profits over £250,000, and marginal relief applies in between (see marginal relief).

Dividends from a 51% subsidiary, or from a fellow 51% subsidiary of the same parent, are excluded from augmented profits by section 18L(3), as are dividends from a trading company or relevant holding company that is a quasi subsidiary. Dividends from smaller holdings and from unconnected companies count. The number of associated companies also divides the limits, so both points need checking together.

Illustration only. A standalone company has taxable profits of £40,000 and receives £30,000 of dividends from a 20% holding in an unconnected trading company. The dividends are exempt and no tax is charged on them. But augmented profits are £70,000, above the £50,000 lower limit, so the company pays the main rate less marginal relief on its £40,000 of taxable profits instead of 19%. If the dividends had come from a 51% subsidiary they would have been excluded, and the small profits rate would have applied.

What are the common mistakes?

  • Assuming every overseas dividend is exempt for a small company. A payer outside the UK and the qualifying territories, or one denied treaty benefits, produces a taxable dividend.
  • Using the wrong size test. The Part 9A test uses the EU recommendation, aggregated across linked enterprises, not the £50,000 profit band.
  • Ignoring augmented profits when working out the rate, as in the illustration above.
  • Treating disguised interest as a dividend. HMRC explains at INTM655070 that interest above a reasonable commercial return, or results dependent interest, can be recharacterised as a distribution under section 1000(1) E or F, and such distributions cannot be exempt.
  • Confusing dividend exemption with gains exemption. Part 9A deals with dividends received. Gains on selling shares are a separate question, usually answered by the substantial shareholding exemption.

For the wider computation of a company’s tax, see Corporation Tax explained.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.