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HMRC internal manual

International Manual

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HM Revenue & Customs
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Controlled Foreign Companies: Relevant Interests in a CFC: Other Relevant Interests

Where a person other than a UK resident company, or a person related to a UK resident company, holds a direct interest that person’s direct interest will be taken to be a relevant interest unless that direct interest is the same as another person’s relevant interest that is held indirectly through that person. This has the effect that a person’s interest under this section will only be a relevant interest if it is a direct interest in the CFC that is not otherwise a relevant interest of a UK resident company (INTM227300) or a person related to a UK resident company (INTM227400) by virtue of their own indirect interest. So, for example, if a third-party individual holds a direct shareholding in a CFC, this will constitute a relevant interest in that CFC as there can be no indirect interest held in that individual by a UK resident company or a person related to a UK resident company.

Special rules for certain interests

For the purposes of determining whether an interest held is a relevant interest, special rules apply for certain types of interest held. These rules apply in cases where the interest is held by an Authorised Investment Fund, bare trustee, nominee or otherwise held in a fiduciary or representative capacity.

The rules provided effectively look through how the interest is held and deem the interest to be that for whom they hold it.

Interests held by an Authorised Investment Fund (AIF)

These rules are covered under TIOPA10S371OB (3) &(4). The different rules take account for the possibility that an AIF may take the form of a trust or a corporate entity. Both types of AIF are defined at Chapter 2 of Part 13 of CTA 2010. The subsections ensure that, for the purposes of determining the relevant interests for apportionment purposes, the persons with an interest in the CFC are taken to be the shareholders or unit holders in the AIF. The effect of the provisions is to ‘look through’ the AIF so that the AIF itself cannot be regarded as holding a relevant interest while ensuring that the underlying investors will be considered to hold relevant interests in the CFC.

Example

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I = Individual investor

U = UK resident company

O = overseas interest holder

Each number is equal to the percentage interest held

Without the effect of TIOPA10S371OB(3) and (4) the only relevant person will be the UK AIF and any chargeable profits arising to the offshore fund (the CFC) will be apportioned at step 3 and charged at step 5 of section 371BC(1) on the UK AIF (providing that it is a corporate investment vehicle). The look through provisions at TIOPA10S371OB(3) and (4) effectively ensure that any CFC charge arising will be to the UK corporate investor (“U”).

Interests held by bare trustees or nominees

Where a bare trustee or nominee holds an interest for a person or persons, that person or persons (rather than the trustee or nominee) are treated as holding the interest. This also covers interests that are held in this way where the beneficial interest holder has an interest in an AIF.

TIOPA10/S371OB(6) defines the term bare trustee as a person acting as a trustee for:

  1. a person absolutely entitled as against the trustee,
  2. two or more persons who are so entitled,
  3. a person who would be so entitled but for being a minor or otherwise lacking legal capacity, or
  4. two or more persons who would be so entitled but for all or any of them being a minor or otherwise lacking legal capacity.

Interests held in a fiduciary or representative capacity

For interests that are not covered by the rules for bare trustees and nominees there is a further modification where the interest is held in a fiduciary or representative capacity and there are one or more identifiable beneficiaries. In these circumstances the interest is treated as held by that beneficiary or, if there is more than one beneficiary the interest is apportioned between them on a just and reasonable basis. This also covers interests held in this way where the beneficial interest is in an AIF.