Schedule 14 provides the new exemption, which we have been discussing, from corporation tax for dividends and other distributions from foreign companies. It amends the rules on taxation of distributions received from UK companies. The exemption will remove the need for groups to make complex double tax relief calculations and will allow profits to be repatriated, even in circumstances in which there would not have been enough double tax relief to eliminate a UK tax liability. Until now, when there was insufficient credit for foreign tax, overseas profits would typically stay offshore, with cash possibly being returned in the form of an upstream loan. Alternatively, groups might have adopted complicated, artificial ways of repatriating such profits other than through a dividend. Exemption will sweep all that away and allow for immediate repatriation of profits and the return of cash by dividend. That will enhance the attractiveness of the UK as a location for the headquarters of multinational businesses.
The rules will apply to distributions received by all companies in the UK, including small companies, which was not part of the original proposal. The rules for small companies are distinct from the rules for medium and large companies, but, in each case, the vast majority of all dividends and other distributions will benefit from the exemption. That protection, alongside that contained in clause 40 and schedule 19, which deal with personal dividend taxation, are a proportionate response to the risk of abuse of the exemption by small companiesthe protection set out in the schedule. However, we will keep a close eye on the matter and take immediate action if any avoidance activity is identified.
The hon. Member for Fareham moved amendment 43 on capital distribution. Schedule 14 applies only to distributions of an income nature. The amendment would increase its scope so that it applied to most capital distributions as well. However, schedule 14 is concerned only with the taxation of distributions that represent income. Nothing in the schedule will cause any capital distribution that is currently exempt to become taxable, so there is no reason to extend the scope of the exemption as suggested. The legislation does nothing to alter the taxation of capital distributions that are excluded from the scope of proposed new part 9A of the Corporation Tax Act 2009. There is already an exemption for capital distributions, known as the substantial shareholdings exemption. It is not part of this Bill to change in any way the scope of that exemption, so I hope that he will accept that the amendment is not appropriate.
As the hon. Gentleman explained, amendment 48 would alter the definition of a small company. However, in doing so, it would change the standard definition used to determine whether exemption follows the small company rules or the rules applicable to larger companies. The legislation uses the standard European Commission definition of a small company, which includes a time lag whereby a company that changes from small to medium sized retains the status of small in the transition year but becomes a medium company the following year. A similar rule applies if a company moves down in size from medium to small. The amendment would delay the change of status by a further full year. That would be an additional complication and make it less likely that the appropriate legislation for that size of company was applied. I hope the hon. Gentleman will accept that that is an unhelpful additional complication.
Several Government amendments in this group are concerned with a rule that denies exemption if a foreign tax deduction is given for the distribution, on the basis that a distribution that is tax deductible represents a deduction from taxable profits rather than distribution of those profits. Therefore, it is closer to an interest receipt than a distribution and would be expected to give rise to a taxable receipt for the recipient. The rule denying exemption is extended to cases where amounts determined by reference to a distribution are tax deductible. That ensures that the rule cannot be side-stepped by the use of indirect tax deductions obtained through avoidance schemes. The change will also enable some simplification of the manufactured dividend rules, which no longer require a specific exception. I therefore recommend that Government amendments 92, 93, 99,101 and 102 to schedule 14 be accepted. I hope that the hon. Gentleman will not press amendments 43 and 48.