US and UK scrap dividend tax

Paul O'Neill: In Britain to meet Gordon Brown

The US and the UK have signed a treaty to eliminate tax on dividends repatriated to Britain.

The so-called withholding tax on the profits of British subsidiaries has been levied at 5%, and its abolition should save UK firms tens of millions of pounds a year.

British companies have long lobbied the government to scrap withholding tax on their US earnings.

The treaty was the highlight of Tuesday's talks between US Treasury Secretary Paul O'Neill and the UK's Chancellor of the Exchequer, Gordon Brown.

Withholding tax, which is also levied on international flows of interest income, has long been a subject of tension between governments.

Late last year, Mr Brown claimed victory in a three-year battle against an EU-wide withholding tax on interest.

Pension benefits

Not all British companies will qualify - only those that hold more than 80% of their US subsidiary's shares.

British pension funds will also benefit, by having the withholding tax on their dividend earnings from the United States cut to zero from the current 15%.

The new tax treaty also contains a provision allowing for the US tax authorities to seek information about income earned by their citizens in Britain, even if those citizens are not resident here.

Each country is the biggest inward investor in the other, and the treaty - which has taken three years to negotiate - is described by UK officials as a "milestone" in the relationship between the two.

It replaces a tax treaty drawn up in 1975.

British officials said they did not think there would be any cost to state revenues from the new rules.