Effect of Dividend Income
8.172. One further point remains to be dealt with. It concerns the provisions of the Act aimed at preventing the double taxation of dividends flowing through intermediate companies. The Act provides (section 46) that a rebate of company tax is allowable in respect of dividends received by one company from another. The section generally operates to render dividends received by one company from another virtually free of tax in the hands of the receiving company. However, the dividends received form part of the net income of the receiving company; and in the event of the receiving company incurring a trading loss, this loss is applied against dividend income and is not available for deduction against trading profits of other periods.
8.173. There are two ways in which the result may be viewed, both of which suggest that the tax payable by the company is excessive. The first view is that to the extent to which the loss is offset against dividend income, the dividends ultimately bear double taxation. The second view is that to the extent to which the losses are so offset, no allowance in made for that proportion of the loss in computing company tax and in fact the loss is never recouped.
8.174. The Committee believes that it ought to be a fundamental principle of company tax that dividends flowing through
intermediate companies should not incur double taxation and, further, that the full benefit of trading losses should
be available for offsetting against other trading profits. Accordingly, it recommends that in computing the recoupment
of losses of companies, amounts representing dividends
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received from other companies should be excluded
from the net income of the relevant years. There would continue, of course, to be need to counter dividend-stripping
opportunities.