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HMRC internal manual

Company Taxation Manual

Distributions: general: securities within CTA10/S1000 (1) F

CTA10/S1000 (1) F applies to interest or other distributions in respect of ’special securities’ which meet any of the conditions in A to E of CTA10/S1015. These are:

Condition A: CTA10/S1015 (2)

  • Bonus securities within CTA10/S1000 (1) D.

If there is a rights issue of securities, and at the same time a bonus issue is involved, a proportion of the interest etc will be treated as interest on a special security under CTA10/S1015(2). The balance may be interest on a special security within another part of CTA10/S1015.

Condition B: CTA10/S1015 (3)

Securities which are:

  • convertible directly or indirectly into shares in the company,


  • carry a right to receive shares in or securities of the company.

This excludes quoted securities and securities issued on terms reasonably comparable with those of quoted securities. A broad view will be taken on whether the terms of issue are reasonably comparable with the terms of issue of quoted securities - see CTM15500.

Condition C: CTA10/S1015 (4)

Securities under which the consideration the company gives for the use of the principal secured is dependent in any way on the company’s results - see CTM15520.

This is aimed at securities that allow the subscriber to participate in the company’s profits. This legislation ensures that the company does not get a deduction for interest in computing CT profits if the interest is in fact a distribution of profits. It will apply even if the consideration in a particular accounting period does not exceed a commercial rate.

In some cases the issuing company may argue that CTA10/S1015 (4) does not apply because the securities are not part of an attempt to allow the subscriber a share of the issuing company’s profits. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Some alternative finance arrangements involve profit sharing agreements. If the alternative finance arrangement meets the conditions of CTA10/S1019 (see CFM44100) the provisions of CTA10/S1015 (4) will not apply and, accordingly, the profit share return paid by the company will not constitute a distribution.

Condition D: CTA10/S1015 (5)

Securities which are ‘connected’ with shares in the company

Broadly speaking, this is concerned with securities that are linked with shares so that it is necessary or advantageous for a person not to transfer the securities without the shares connected with them.

Condition E: CTA10/S1015 (6)

Equity notes issued by a company and held by another company that is associated with the issuing company or is a funded company.

Equity notes are loan instruments designed to take advantage of a difference between their treatment in the UK and that in other countries, notably the USA. Such notes would normally have been treated as debt instruments, and payments made in respect of them as interest. But the notes incorporate features usually associated with equity investment. For example, no provision is made for repayment of the loan (‘perpetual securities’). In the other country the notes would be recognised as equity instruments. As a result, in the hands of the note holder the interest or distribution was often not taxed because it was not paid out of profits of the payer, or, if taxed, credit was allowed for underlying UK tax paid.

There is no territorial limitation on CTA10/S1015 (6). Consequently, it is not overridden by provisions in UK double taxation agreements and therefore applies where the holding company is non-resident. CTA10/S1032 now reflects CTA10/S1015 (6) and so holding companies chargeable to UK CT are generally unaffected by CTA10/S1015 (6).

For the purposes of CTA10/S1015 (6) a security is an equity note (CTA10/S1016) if, as regards the whole or any part of the principal:

  • the security’s terms contain no particular date by which it is to be redeemed, or
  • under the terms of the security the date or the latest date for redemption falls after the expiry of the permitted period (see below), or
  • under the terms of the security redemption is to occur after the expiry of the permitted period if a particular event occurs, and the event is one which is certain or likely to occur, or
  • the issuing company can secure that either:
  •    - there is no particular date by which the security is to be redeemed,


  •    - the date for redemption falls after the expiry of the permitted period and the permitted period is the period of 50 years beginning with the date of issue of the security.

Security as defined in CTA10/S1114 (3) applies for CTA10/S1015 (6) as it does for the rest of CTA10/S1000. However, because the definition of an equity note requires the existence of a security, in normal circumstances inter-company loans or other indebtedness, bank overdrafts and bank deposits will not be within the scope of CTA10/S1015 (6).

Loans that are repayable on notice by the lender (known as demand loans), whether or not evidenced by a security, are not regarded as equity note securities. This is because they contain terms capable of giving rise to a particular date (or dates) by which they are to be repaid.

The company issuing the security, (the issuer), may hold shares in, or control the company holding the security (the lender). However, this will not of itself be treated as giving the issuer a ‘power to secure’ that the security has no particular date for redemption.

For the purposes of CTA10/S1015 (6) a company is associated with the issuing company (CTA10/S1017 (4)) if:

  • the issuing company is a 75 per cent subsidiary of the other company,


  • the other company is a 75 per cent subsidiary of the issuing company, or both are 75 per cent subsidiaries of a third company.

Funded company - CTA10/S1017(3)

For the purposes of CTA10/S1015(6) a company is a funded company (CTA10/S1017(3)) if there are arrangements involving the company being given funds (directly or indirectly) by the issuing company or by a company associated with the issuing company.

The ‘funded company’ concept was introduced to prevent parties to an equity note arrangement side-stepping the legislation by inserting an unconnected company between them. A company that incidentally holds an equity note issued by a company with which it directly or indirectly has a business relationship incidentally will not be treated for that reason alone as a ‘funded company’.

The use of the term ‘arrangements’ points to a link between the putting in funds of a borrower and the holding of an equity note. A company holds an equity note if it is the beneficial owner of the security and is not holding the equity note as a nominee.