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HMRC internal manual

International Manual

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HM Revenue & Customs
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Controlled Foreign Companies: Control: Legal and economic control: Legal control

TIOPA10/S371RB(1)

Legal control is defined to mean that through the holding of shares (either directly or indirectly), the possession of voting power or any other similar power a person is able to secure that the affairs of a company are conducted in accordance with his wishes.

Legal control is extended so that where two or more persons taken together have the power to secure that the affairs of a company are conducted in accordance with their wishes, they are treated as having control of it. The two (or more) persons do not have to be connected to each other to be taken to have control and so two unconnected persons holding 30% of a company’s voting power each will be treated as controlling the company.

Legal control is not limited to a direct shareholding in a non-UK resident company. If for example company A, resident in the UK, owns 100% of the voting shares in non-UK resident company B, which in turn owns 100% of the voting shares in non-UK resident company C, then A controls C by means of its holding of shares in B.

As well as establishing control by reference to the holding of shares or voting powers, legal control can be established by reference to powers conferred by the articles of association of the non-UK resident company or other documents that regulate the company or any other company. The type of other documents that regulate the company or other company are not defined but in the context of the CFC rules and in particular the establishment of control they are not considered to be limited to just documents that are required by local company law.

The test is not a mechanical one based simply on, for example, shareholdings or voting rights. The aim is to establish whether a person (or persons) has the power to ensure that the affairs of a company are conducted in accordance with that person (or their) wishes. If such power is exercisable only as a result of shareholding, it is to the shareholdings that one would look to determine control but it will not be a simple mechanical or mathematical test.

Examples

In the following structure the percentages relate to holdings of ordinary shares that carry the same proportionate voting rights:

Use this link to view example structure

On a purely mathematical basis, UK has only 48.75% of the voting power of NR2. It nonetheless has the power to secure that the affairs of NR1 are conducted in accordance with its wishes and as NR1 has control of NR2, UK also has the power to secure that the affairs of NR2 are conducted in accordance with its wishes. NR2 will therefore be a CFC within the meaning of TIOPA10/S371RB(1), by virtue of the shareholdings.

On the other hand, assume a slightly different structure (again the percentages relate to holdings of ordinary shares that carry the same voting rights):

Use this link to view  different example structure

On a simple mathematical calculation, UK1 has 35% of the voting power of CFC and UK2 has 25% of the voting power of CFC, giving a total of 60% which would appear to give control to persons resident in the UK. If, however, one person owned the remaining 65% of the shares in Joint Venture, that person would on their own on a purely mathematical basis have 65% of the voting power of the CFC. Clearly, one cannot have 125% voting power in a company and the reason for the additional 25% is that UK2’s shareholding in CFC has effectively been counted twice.

However, simply eliminating the apparent double counting will not necessarily provide the answer as to who controls CFC. In the above scenario, for example, eliminating the double counting reduces the total shareholding in CFC of UK1 and UK2 to 51.25% of the voting power (UK2’s 25% + UK1’s 35% x 75% (=26.25%)). Again, this would appear to give control to persons resident in the UK. Yet UK1 and UK2 are clearly not in a position - even together - to secure that the affairs of CFC are conducted in accordance with their wishes. UK1’s minority interest in Joint Venture does not confer additional control over CFC. The other shareholder(s) of Joint Venture could prevent that happening - whether or not any of those shareholders themselves is in a position to exercise control. As such, CFC is not a CFC as it is not controlled by UK persons for the purposes of Part 9A.