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HMRC internal manual

Company Taxation Manual

Corporation Tax: loss-buying: change in ultimate parent

CTA10/S724A

Background

A group may decide to insert a new company at the top of the group structure either as part of a corporate inversion, as part of an initial public offering, or a general reorganisation.  Without this section, the insertion of a new ultimate parent company would constitute a change of ownership under the first condition of CTA10/s719 (see CTM06340): one person acquiring more than 50 percent of the share capital of a company. 

A change in a parent company’s ownership entails a change of ownership for all of its subsidiaries (CTA10/S723; see CTM06350).  Hence if the ultimate parent company in a group changes ownership it would mean that all companies in the group would be treated as having undergone a change of ownership. As this is the top company in the group, the exception for changes in intermediate holding companies (CTA10/S724, see CTM06350) does not apply.

Overview and commencement

S724A has effect for any change of ownership occurring on or after 1 April 2014. 

The section is designed to ensure that a change in the ultimate parent company of a group does not constitute a change of ownership under CTA10/Part 14 provided certain conditions are met regarding continuity in the shareholding of the old and new companies. 

The rules work in situations where all of the share capital of the existing ultimate parent is acquired by a new company, and at the same time the shareholders of the old ultimate parent become shareholders in that new company, retaining their proportionate voting rights and entitlement to profits and assets.

Conditions on the new ultimate parent company

Certain conditions must be satisfied.  The new company must:

  • Possess all the voting power in the old company;
  • Be beneficially entitled to 100 percent of the profits available for distribution by the old company; and
  • Be beneficially entitled to 100 percent of the assets available for distribution on any winding up of the old company.

‘Beneficially entitled’ should be read in accordance with CTA10/Part 5/Chapter 6 (see s151 and following; CTM81000).

Continuity between the old and new ultimate parent companies

The new company must also meet the following continuity requirements (s724A(4)):

  • The shares in the old company are sold purely in exchange for the issue of shares in the new company;
  • Immediately after the acquisition all those who were shareholders in the old company immediately before the acquisition are shareholders in the new company;
  • Immediately after the acquisition the shares in the new company are of the same classes as the shares in the old company were immediately before acquisition;
  • The proportions of the share classes remain the same in new company immediately after acquisition as they were in the old company immediately before acquisition, and
  • Immediately after the acquisition, the proportion of shares of each class that each shareholder holds in the new company is the same as that held by each shareholder in the old company immediately before the acquisition.

Essentially this seeks to ensure that all of the original shareholders in the old ultimate parent are now shareholders in the new ultimate parent, with the same rights and entitlements proportionate to the other shareholders as they had before the change.

It is possible for a company to issue treasury shares (shares in itself which it keeps in ‘treasury’ rather than being issued to shareholders).  In some jurisdictions it is a requirement for a company to do so.  It is not necessary for the old company, following the acquisition, to own shares in the new company corresponding to the old company’s treasury shares in itself prior to the acquisition, providing that the continuity conditions are in all other respects met. 

Scheme of reconstruction

The rules outlined above assume a share for share exchange where all the old shareholders acquire shares in the new company as consideration for disposing of their old shares.

S724(5) extends the rules to apply in the case of a scheme of reconstruction involving a compromise or arrangement to which Part 26 of the Companies Act 2006 applies.  This is, broadly speaking, a situation where 75 percent or more of those with an investment in the company decide to take an action and the UK court sanctions that action, which then becomes binding on all members.  Where the compromise or agreement is that the shares in the old company be cancelled and replaced by issue of shares in the new company this can fall within S724A and is taken to meet the conditions above.

All the continuity conditions above must be met, with any reference to “immediately before the acquisition” being replaced with a reference to “immediately before the shares in the old company were cancelled”. In addition, the new company must own all of the share capital in the old company by reason of it being issued to them by the old company and the shares in the new company must be issued only to persons who were shareholders in the old company immediately before the shares in the old company were cancelled. If action is taken under a parallel rule from a jurisdiction other than the UK with the same result then S724A will also apply.  You should consider whether the rule is actually the same; the key consideration is whether it results in all of the shareholders in the old company becoming shareholders in the new company and retaining all of their rights and proportionate entitlements.  HMRC will consider each case on its facts.

New ultimate parent must be a new company

The new ultimate parent must not have issued any shares other than subscriber shares, and must not previously have carried on any trade or business.

Some jurisdictions may require a company to issue other types of shares at formation or in advance of undertaking a reconstruction.  HMRC will consider each case on its facts, and the key consideration will be whether those other shares interfere with the continuity requirements for the shareholders in the old and new companies.