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HMRC internal manual

Company Taxation Manual

Introductory: meaning of ordinary share capital: share capital: foreign registered companies

The UK tax rules are based on UK company law.  This means that companies formed under foreign law will usually require analysis of at least some of their features by comparison and analogy with the UK Companies Acts.

In Ryall v The Du Bois Co Ltd (1933) 18 TC431, Lord Hanworth MR said, “a share in a foreign company may be something different from and, indeed, is almost necessarily different from, a share as we know it in an incorporated company”, and Slesser LJ said, “we have to consider what would be analogous to stocks and shares in Germany in dealing with what is a company, and allowing for differences of law in that country”.  Approach by analogy is applied generally in addressing foreign registered companies.

The key feature of issued share capital is that the issuing body has full legal personality separate and distinct from that of its members, able to carry on business and to own assets in its own right.  This establishes proprietorial interest though the holding of issued share capital in the body in contrast to partnership interests.  In UK partnership law partnership property is held and applied by the partners for the purposes of the partnership (PA1890/S20 (1)) and the partnership is the relation between the persons carrying on the business (PA1890/S1 (1)).

(In Scotland a firm is a legal person distinct from its members, PA1890/S4 (2), but S1 (1) and S20 (1) still apply.  This is because, whether partnership property is held in the name of the firm, or in the name of partner or partners, the persons ultimately beneficially interested in it are the partners according to their partnership rights – per The Scottish Land Court SLC/248/04) following an examination of the authorities.  Partnerships established under Continental civil law present similar challenges; their “legal personality” may mask what is under civil law known as intuitu personae, or originating in the persons).

Capital in this context means a contribution that provides the contributor with an equity interest in (i.e. part ownership of) the body, as reflected in the proportion and nature of shares held in the fixed capital.  CA06/S5 (3), in considering the remaining class of companies limited by guarantee with a share capital (see CTM00512), observes that any provision that divides a company’s undertaking into shares or interests is a provision for share capital.

This means dividing the company itself, its “corpus”, as referred to in Rae v Lazard Investment Co Ltd (1961-64) 41 TC 1.  An equity or ownership interest in a body is distinguished from a debt claim against it.

The Special Commissioners in the South Shore Mutual Insurance case (see CTM00512), identified characteristics of “incidents” of share capital, but these are pointers rather than absolute requirements.  For instance, shares may be non-voting.  Important incidents, in relation to members’ interests are:

  • whether they are like shares in share capital (a portion of the capital of the corporate body) or like debt (money owed by the body corporate to the members),
  • what proprietary rights characteristic of shares attach to them, both economic and voting, and what responsibilities,
  • how they are legally evidenced in accordance with local law,
  • whether they are denominated in a stated fixed value,
  • whether the members’ interests compose a fixed and certain amount measuring the company’s capital which creditors may look to as security, and
  • whether the members’ interests are capable of transfer and if so whether such a transfer would amount to transferring of a portion of the capital of the company, with attendant proprietary rights and responsibilities (rather than a claim as creditor).

See CTM00511 for an introduction to the topic of ordinary share capital.