Every company in a group tests its own distributable profits, using its own individual accounts, before it pays a dividend. A parent can only count profits made in its subsidiaries once those subsidiaries have actually paid it a dividend, or become legally bound to pay one, so cash and profits have to be passed up the chain one level at a time, with a separate reserves check and proper paperwork at each level.

Why can a parent not simply rely on the group’s consolidated reserves?

The distribution rules in Part 23 of the Companies Act 2006 apply company by company. Section 830 allows a company to make a distribution only out of its accumulated realised profits, less its accumulated realised losses, and section 836 says the test is applied to the figures in the company’s “relevant accounts”. Where a parent prepares consolidated accounts, it is the parent’s individual accounts, not the group accounts, that count. ICAEW’s introduction to the law on dividends puts it plainly: a parent’s profits available for distribution come from its own activities, not those of its subsidiaries, except to the extent the subsidiaries have made distributions to it. It is irrelevant that a trading subsidiary is sitting on large reserves if they have not been passed up.

A holding company with no trade of its own may show retained earnings of a few thousand pounds while the consolidated balance sheet shows hundreds of thousands. Only its own figure counts. For the general rules on what counts as realised, see distributable reserves under Part 23.

What checks does each company in the chain need to make?

At each level the board of the paying company needs to do the same things it would do for any dividend:

  • Identify the relevant accounts. Under section 836(2) these are normally the last annual accounts, which under section 837 means the individual accounts last circulated to members. If those accounts do not show enough profit, the company can use interim accounts instead.
  • Check the accounts were properly prepared, and if they were audited and the audit report was qualified, that the auditor has stated whether the qualification is material to the distribution (section 837(4)).
  • Consider whether losses since the balance sheet date have eaten into the profits shown. ICAEW notes that for a private company the gap between the last annual accounts and a dividend can be up to 21 months.
  • Consider the directors’ wider duties, including the position of the company’s own creditors. A subsidiary’s directors owe their duties to the subsidiary, not to the group; see the creditor duty of directors.
  • Follow the articles on who declares the dividend, and minute the decision.

When does a dividend from a subsidiary count as the parent’s realised profit?

Receiving a dividend is not automatically a realised profit for the parent. ICAEW and ICAS guidance TECH 02/17BL, which is the accepted statement of what “realised” means for section 853(4), says at paragraph 9.5 that a dividend received or receivable from a subsidiary is a realised profit only if the consideration is qualifying consideration, broadly cash or a receivable that is reasonably certain to be settled.

The guidance then deals with the common ways groups move dividends:

  • Cash transfer. Paragraph 9.12 says payment is clear where cash moves.
  • Book entry that reduces what the parent owes the subsidiary. Paragraph 9.13 treats this as settlement by set off, equivalent to a cash payment on the date both companies make the entries, provided the parent’s balance owed to the subsidiary does not go below nil.
  • Book entry that creates or increases a debt owed by the subsidiary. Paragraphs 9.14 to 9.16 say more than ledger entries is likely to be needed, such as a deed acknowledging the debt, and only where there is no doubt the subsidiary can pay.
  • Payment through a group treasury function. Paragraph 9.15 treats an instruction to debit the subsidiary’s treasury account and credit the parent’s as payment.

Paragraph 9.19 adds an anti avoidance rule. If the parent funds the dividend, or reinvests the money in the subsidiary through a share subscription, a capital contribution or a loan that is not qualifying consideration, the dividend may be an unrealised profit for the parent and cannot be passed on.

Why does timing around the year end cause problems?

A dividend has to be recognised in the right company’s accounts at the right date. HMRC’s Savings and Investment Manual at SAIM5040 explains that a final dividend declared without a later payment date becomes an enforceable debt on declaration, while an interim dividend can be varied or rescinded at any time before payment, so it is only due and payable when actually paid. TECH 02/17BL paragraph 9.7 follows the same logic: a parent accrues a dividend receivable only when the subsidiary has a legally binding obligation to pay it, and paragraph 32.8 of FRS 102 says dividends declared after the end of the reporting period are not a liability at that date.

The practical consequence is spelled out at paragraph 9.8 of TECH 02/17BL: a group may need to pay subsidiary interim dividends, or create a legally binding liability to pay them, before the parent’s year end so that the parent’s own accounts show enough distributable profits for its intended final dividend. Paragraph 9.17 notes that any doubt about an interim dividend booked through intercompany accounts can be removed by turning it into a final dividend before the year end, which for a private company can be done by members’ written resolution. The differences between the two types are covered in interim and final dividends.

Can the parent pay its own dividend straight away using interim accounts?

Yes, if its last annual accounts do not show enough profit. Section 836(2)(a) allows a distribution that would breach Part 23 by reference to the last annual accounts to be justified by interim accounts. For a private company, section 838(1) only requires accounts that enable a reasonable judgment to be made of the profits, losses, assets, liabilities, provisions, share capital and reserves. A public company’s interim accounts must also be properly prepared, signed and delivered to Companies House before they can be relied on (section 838(2) to (6)).

So in a chain of private companies, the subsidiary pays first, each intermediate company prepares interim accounts showing the dividend it has received, and then pays on. Each set of interim accounts should be kept with the board minute approving the dividend.

Could the dividend reduce the value of the parent’s investment?

It can. TECH 02/17BL paragraph 9.5 reminds parents to consider the effect of the dividend on the carrying value of the investment in the subsidiary. If a subsidiary pays out most of its net assets, its value may fall below the cost of the investment in the parent’s books. Any impairment is a realised loss for the parent and reduces what it can pass on. This is common where a subsidiary was bought with reserves already in it.

How are dividends between group companies taxed?

A UK company receiving a dividend is within the charge to corporation tax under Part 9A of the Corporation Tax Act 2009 unless the distribution is exempt (section 931A). For a recipient that is not small, section 931E puts dividends from a company the recipient controls into an exempt class, and section 931D then exempts them subject to conditions. A small company recipient has its own exemption in section 931B for dividends from companies resident in the UK or a qualifying territory. In a typical UK group, dividends paid up the chain are therefore exempt. For the paying company, section 1168 of the Corporation Tax Act 2010 treats a dividend as paid when it becomes due and payable. For group relief of losses, which is a separate regime, see group relief.

How might this look in practice?

Illustration only. Holdco owns Midco, which owns Tradeco. Their last annual accounts show realised profits available for distribution of £10,000 (Holdco), £20,000 (Midco) and £500,000 (Tradeco). Holdco’s shareholders want a £300,000 dividend.

Step Company Action Profits available after the step
1 Tradeco Board pays a £300,000 interim dividend in cash to Midco, justified by its last annual accounts £200,000
2 Midco Prepares interim accounts showing £320,000 and pays £300,000 in cash to Holdco £20,000
3 Holdco Prepares interim accounts showing £310,000 and pays £300,000 to its shareholders £10,000

If at step 1 Tradeco had only booked a payable to Midco on intercompany account, and nobody executed anything to make it binding, Midco could not safely treat the amount as a realised profit, and Holdco’s dividend would rest on profits that did not yet exist in law.

What mistakes come up most often?

  • Paying the parent’s dividend first and the subsidiary dividends later the same day or week, so the parent’s profits did not exist when it paid.
  • Relying on consolidated reserves rather than the parent’s individual accounts.
  • Booking intercompany entries without paying cash, setting off or documenting a binding liability.
  • Recycling the cash straight back into the subsidiary in a way that makes the parent’s profit unrealised.
  • Ignoring an impairment of the investment in a subsidiary that has paid out its reserves.

Getting this wrong makes the dividend unlawful. Under section 847 a shareholder who knew or had reasonable grounds to believe the distribution breached Part 23 must repay it. In a group the same people often sit on both boards, so arguing that the parent did not know is rarely realistic. The directors’ personal exposure is covered in unlawful dividends and director liability.

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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.