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The corporation tax regime for loan relationships includes provision to
charge to corporation tax profits on certain types of shares where these are
intended to generate returns that are economically equivalent to deposit
interest. These rules are known as the “shares-as-debt” rules. Ordinarily
dividends and other distributions of a UK company are not chargeable to
corporation tax in the hands of a UK resident company. However, the
shares-as-debt rules over-ride this in respect of dividends and certain
other distributions. For distributions paid on or after 9 October 2007, the
shares-as-debt rules are extended to over-ride the corporation tax exemption
for all types of distribution. HMRC indicates that this responds to the
disclosure of schemes structuring the returns on such shares as
distributions which would not otherwise be taxable under the shares-as-debt
rules.
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