Corporation Tax Act 2010 section 161

Meaning of "restricted right to dividends"

Section 161 defines what constitutes a "restricted right to dividends" for the purposes of determining whether shares qualify as ordinary shares under the group relief equity holder rules.

• A right to dividends is "restricted" only if the dividends represent no more than a reasonable commercial return on the consideration the company received for the shares, and one of three additional conditions is met.
• The three conditions cover fixed-rate dividends, dividends that fluctuate in line with a published index (such as a standard interest rate or the retail prices index), and dividends that may be reduced or withheld only in special circumstances such as severe financial difficulties or regulatory recommendation.
• For shares where the company has the power to reduce or withhold dividends, the right can still be treated as restricted if the company can only exercise that power in special circumstances, or if it is reasonable to assume it would only do so in special circumstances.
• The Treasury has a power to specify by order what constitutes severe financial difficulties, and the relevant regulatory bodies whose recommendations count as special circumstances include the Prudential Regulation Authority, the Financial Conduct Authority, and equivalent overseas regulators.