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HMRC internal manual

Company Taxation Manual

Collective investment schemes: authorised investment funds: taxation of participants within the charge to CT: non-qualifying investments test

Rules for determining when a company holding fails the non-qualifying investments test– paragraph 8 Schedule 10 Finance Act 1996 (as amended by SI2006/981)

The non-qualifying investments test is similar to, but slightly wider than the test which has to be satisfied by an authorised investment fund (AIF) if it is to make interest distributions (CTM48265).

The test is failed at any time when the AIF has qualifying investments (as listed at FA96/SCH10/PARA8 (2)) which have a market value over 60% of the AIF’s total assets.

The list at paragraph 8(2) includes all the qualifying investments which enable an AIF to make an interest distribution as set out in SI2006/964 Regulation 20 (CTM48260 - CTM48270) – hence any holding in an AIF which could make an interest distribution (whether or not it actually does so) automatically fails the test.

In addition the list includes qualifying holdings in offshore funds (that is any holdingin an offshore fund that would itself fail to satisfy the non-qualifying investments test).

It should also be noted that a person within the charge to CT (usually a company) is required to treat the holding as a loan relationship (as described at CTM48505) if the AIF in which it has a holding fails the test at any time during that person’s accounting period for CT.

In contrast an AIF may only make an interest distribution if it satisfies the qualifying investment test as set out at SI2006/964 Regulations 19 and 20 (CTM48260 onwards) for the whole of its distribution period.