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HMRC internal manual

International Manual

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Controlled Foreign Companies: Apportionment of a CFC’s Chargeable Profits and Creditable Tax: Indirect Shareholdings

TIOPA10/S371QE (indirect shareholdings) and TIOPA10/S371QF (variable shareholdings supplement the application of section TIOPA10/371QD regarding apportionments to be made in proportion to shareholdings

TIOPA10/S371QE explains how to calculate the percentage of a CFC’s issued ordinary shares represented by the indirect interest of a relevant person (“R”). The calculation is illustrated in the following examples, in which the terms ‘P’ and ‘S’ take the meanings given in TIOPA10/S371QE(2) and the relevant interest of relevant person R is P x S.

P is a product of interests expressed as fractions of the CFC’s issued ordinary shares (called in this guidance ‘fractional interests’). The first fractional interest is that held directly by R in the shares of a share-linked company. A share-linked company is a company which is linked by shares (directly or indirectly) to the CFC. The second fractional interest will be the interest that that share-linked company (i.e. the company in which R holds a direct interest) holds directly in the next share-linked company; and so on for the third and any other fractional interests. The product will not however include the fraction that the lowest share-linked company (that is to say the company that holds shares directly in the CFC) holds in the CFC.

S is the percentage of the total issued ordinary shares in the CFC that is represented by the shares indirectly held by R

Example 1 - indirect shareholdings single chain

Relevant person A owns 80% of the shares in overseas company B, which in turn holds 90% of the shares in overseas company C, which in turn holds 90% of the issued ordinary shares in the CFC.

The fractional interest A has in B is 0.80 and the fractional interest B has in C is 0.90. As C directly holds shares in the CFC its fractional interest is not counted. P is the product of the two fractions: 0.80 x 0.90 = 0.72.

S is 90%, which is the percentage of the issued ordinary shares that A holds indirectly - it is equal to the proportion of the total issued ordinary shares that is held by C.

A’s relevant interest therefore represents the percentage of the CFC’s issued share capital given by multiplying P and S. Hence the percentage is 0.72 x 90%, which is 64.8%.

TIOPA10/S371QE(4) provides the process for determining the relevant interest where the relevant person holds more than one indirect holding of ordinary shares in the CFC. In that case the formula ‘P x S’ in TIOPA10/S371QE(2) is applied to each holding and then the results of each calculation are aggregated.

Example 2 - indirect shareholdings multiple chains

Relevant person A has a relevant interest of 64.8% through one indirect holding in the CFC as shown in example 1. A also owns 75% of the shares in overseas company D, which in turn holds the remaining 10% of the issued ordinary shares in the CFC.

The fractional interest A has in D is 0.75 and D holds 10% of the shares in the CFC. As D directly holds shares in the CFC its fractional interest is not counted. P is therefore 0.75 and S is 10%. The formula ‘P x S’ in TIOPA10/S371QE(2) gives the percentage 0.75 x 10% = 7.5%.

A’s relevant interest therefore represents the percentage of the CFC’s issued share capital given by the sum of the two percentages 64.8% and 7.5%, giving 72.3% altogether.

When two or more persons jointly have a beneficial interest in a company they are treated as having the same interest in equal shares.