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HMRC internal manual

Guidance on Real Estate Investment Trusts

Group conditions and rules: Distribution Condition: legal impediment


If the principal company is prevented by law from distributing 90% of the group’stax-exempt income, then the condition is regarded as having being met if the principalcompany distributes as much as it legally can. This is set out in section 107(9) asmodified by paragraph 6(4) Schedule 17 FA 2006. See GREIT02055 forexamples of what would be regarded as a legal impediment for section 107(9) purposes.

For example, the tax-exempt income of a Group REIT is 100, of which the principal companyP is prevented by law from distributing 25. The normal distribution requirement would befor P to distribute 90% of 100 = 90, so the condition is satisfied if P distributes 75. Ifhowever, the unlawful distribution is 5, P would be required to distribute 90 to meet theDistribution condition.

Subsidiary restricted

The legal restriction can be one affecting a subsidiary rather than the principal– as set out in section 107(9) as modified by paragraph 6(5) Schedule 17 FA 2006. Ifit is unlawful for a subsidiary to pay up some or all of its profits as a dividend, thenthe distribution requirement is satisfied if the principal company distributes as much aslegally it can.

For example, the principal company P has tax-exempt income of 50 and subsidiary S has tax-exempt income of 100, of which S is prevented by law from distributing 25. The normaldistribution requirement would be for P to distribute 90% of 150 = 135, so the conditionis satisfied if P distributes 75 + 45 = 120. If however, the unlawful distribution is 5, Pwould be required to distribute 135 to meet the Distribution condition.

This is a consequence of how the 90% distribution condition works for Group REITs. Itapplies to the aggregate of the tax-exempt profits of all the group members. The conditionis not that 90% of the tax-exempt profits of each group are distributed.

The principal company cannot get round the distribution requirement by leaving tax-exemptprofits in non-resident subsidiaries and claiming that it has insufficient distributablereserves of its own to pay out to the level required. It is up to the principal company toensure it has sufficient funds to meet the requirement.

Applicable law

For legal impediment get-out, law means UK law (including Northern Ireland legislationand Acts of the Scottish Parliament) (section 107(9)(a)(i) FA 2006). There are howeverpowers to allow laws of other countries to be added by regulation. No regulations havebeen made under this power.