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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - Exempt Activities Test ('EAT'): Repeal of exemptions for superior and non-local holding companies: treatment of qualifying holding companies during transitional period

FA09/SCH16/PARAS 16 & 17: Extent of transitional period

For a qualifying holding company 1 July 2009 marks the beginning of a two year transitional period in which the superior and non-local holding company rules will continue to be available subject to the provisions of paragraph 17. The transitional period defers the commencement date for qualifying holding companies until 1 July 2011 after which only the local holding company exemption will be available.

Paragraph 16 contains the definition of ‘relevant accounting period’, a term employed in paragraph 17. A relevant accounting period is one that falls within the two year transitional period established for qualifying holding companies by the deferred commencement date.

The relevant periods will generally be two ‘split’ periods created by FA09/SCH16/PARAS 14 and 15 (see INTM204270) and the intervening accounting period of the CFC.

FA/09SCH16/PARA17: Special rules applying in transitional period

FA09/SCH16/PARA17 contains the special rules that apply to a qualifying holding company in the transitional period. They set out that in relation to a relevant period of a qualifying holding company, ICTA88/SCH25/PARAS 6(4) and (4A) have effect subject to certain specified conditions. These mean that transitional relief is not automatically available to qualifying holding companies where levels of non-qualifying gross income exceed historic flows.

These criteria are set out in FA09/SCH16/PARA17(2). They say that the non-local and superior holding company rules in SCH25/PARAS 6(4) or (4A) will only apply if the conditions set out in those paragraphs are satisfied, and additional criteria, referred to as conditions A and B, are also met.

Condition A is that at all ‘material times’ the group of companies of which the CFC was a member must have had the same ultimate parent. Sub-paragraph (4) defines ‘material times’ as at the beginning of 9 December 2008 and all times during the accounting period in question.

Condition B is satisfied where the amount X does not exceed amount Y.

SCH16/PARA17(6) identifies amount X as the amount of the CFC’s gross income in the accounting period that is ‘non-qualifying gross income’, defined in SCH16/PARA17(9) as gross income which does not help a CFC satisfy the existing non-local and superior holding company rules. This definition builds on the existing statutory term ‘gross income’, used in ICTA88/SCG25, which broadly speaking refers to the full amount of any income to which a CFC is entitled during an accounting period before any expenses are deducted.

Exemption is available under the existing holding company rules where at least 90 per cent of a holding company’s gross income during the accounting period comes from companies that it controls and which, if not themselves holding companies, are engaged in exempt activities. There are detailed rules setting out what income can qualify as part of the 90 per cent for each of the different types of holding company.

SCH16/PARA17(7) establishes that amount Y is the highest amount of non-qualifying gross income arising in an earlier reference period or periods. Sub-paragraph (9) specifies that a reference period is an accounting period of the CFC that is any one of its last three accounting periods ending before 9 December 2008, and an accounting period in relation to which the CFC was an exempt holding company. However where there is no reference period the Schedule specifies a default reference period of 12 months ending on 9 December 2008.

SCH16/PARA17(8) provides for a time apportionment where amounts X and Y arise in periods of differing length to ensure that the comparison between the two amounts is consistent.

The effect of SCH16/PARA17 is to limit the amount of non-qualifying gross income in the transitional periods to the highest amount arising in any of up to three earlier reference periods. As is made clear in paragraph 17(2)(a) the existing gross income test must be satisfied so at least 90 per cent of the CFC’s gross income must be qualifying income. However, notwithstanding this, if the amount of non-qualifying gross income in the relevant period exceeds the level set by amount Y then the CFC will fail to qualify for exemption