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HMRC internal manual

Capital Gains Manual

Capital contributions to companies: general

The company law provisions of some foreign jurisdictions, notably the USA, provide for the making of capital contributions to companies. A capital contribution is a contribution to the equity capital of a company, but is not made in exchange for shares issued to the contributor and it does not constitute a separate asset in its own right. See INTM503050 where any equity function arguments are raised.

An overseas company receiving a capital contribution may treat it in a number of ways, depending on the law of the foreign jurisdiction concerned and the conditions attaching to the payment. These may give the company a choice whether to designate the contribution as `surplus’ or as `capital’. Amounts designated as ‘surplus’ may be available for distribution to shareholders, subject to solvency requirements. Amounts designated as ‘capital’ may only be repayable by way of a capital reduction. A company’s balance sheet will generally show capital contributions made to it as an item of shareholders’ funds separate from paid up share capital. Capital contributions may be described, for example, as `additional paid in capital’.

Capital contributions are not recognised under UK company law and if a payment is not made as part of the terms of issue of shares, it is possible it is either a loan or a gift. If a UK taxpayer contends that a sum paid to an overseas company is a capital contribution rather than a loan or gift, evidence to support that contention should be sought.

For example if a UK company suggests a payment to an overseas affiliate is a capital contribution rather than a loan or gift there should be evidence of the appropriate treatment in the company accounts. If however there is a possibility that the money can be repaid, it is likely to be a debt within the loan relationships regime, see CTM51200. It is therefore necessary to examine all the circumstances surrounding the money transfer before coming to any conclusion as to what the nature of the payment is. If however agreement cannot be reached as to the nature of the payment and therefore the tax consequences (see CG43501 and CG43502 below), the decision lies with the Tribunals and the Courts.

Occasionally a capital contribution may be made to a UK company. As capital contributions are not a concept formally recognised within UK company law, a contribution received by a UK company should be reported within distributable reserves either as a gift or possibly a donation. If however it can be repaid in any circumstances it should be considered as a loan falling within the loan relationships regime.