CFM62915 - Foreign exchange: matching: derivative contracts used to hedge share transactions: relevant shareholding

REG 5ZA(4)(b) S.I. 2004/3256

REG 5ZA applies to disregard certain profits and losses where there is a hedging relationship relating to an ‘anticipated transaction’, being the acquisition or disposal of a ‘relevant shareholding’.

A relevant shareholding is either:

  • a substantial shareholding in another company; or
  • a holding of qualifying shares in another company where the company entering into the hedging relationship is a Qualifying Asset Holding Company (QAHC)

Substantial shareholding requirement

The acquisition or disposal of shares in another company under the ‘anticipated transaction’ (in the case of a company that is not a QAHC) must be of a substantial shareholding at the date the derivative contract is entered into.

For the purposes of this test, substantial shareholding has the same meaning as in paragraph 8 of Schedule 7AC TCGA 1992 (see CG53072). It is not necessary that the exemption would actually apply to a disposal of the shares in question.

There is a relevant shareholding if, at the time the derivative contract is entered into, the shares to be acquired or disposed of amount to not less than 10% of the share capital of the investee company and entitlement to profits and assets on a winding up. If, after the derivative contract is entered into, the shareholding falls below 10% (for example, due to a rights issue), REG 5ZA could still apply providing all other relevant conditions are met.

Under certain acquisition scenarios, there is a further substantial shareholding requirement at REG 5ZA(3). This relates to the acquisition vehicle in the case of an indirect acquisition of a relevant shareholding, explained in detail at CFM62920.

Relevant shareholding for QAHCs

Where the company who enters into the relevant hedging relationship is a QAHC under FA22/SCH2 then the relevant shareholding takes its meaning of a holding of qualifying shares within FA22/SCH2/PARA53 (see IFM40930).

Consequently, for QAHCs, REG 5ZA is not limited to the substantial shareholding requirement for acquisitions or disposals of qualifying shares. A QAHC can acquire or dispose, directly or indirectly, of a shareholding that is below 10% of the ordinary share capital of the investee company.

There is also a wider meaning of shares for QAHCs which, for example, includes interests in Limited Liability Companies.