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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - Exempt Activities Test ('EAT'): Definition of a holding company

ICTA88/SCH25/PARA 6(6) and PARA12(1)-(3)

A controlled foreign company will be treated as a holding company for the purposes of the exempt activities test if it is

  1. a company the business of which consists wholly or mainly in the holding of shares or securities of either of the following types of companies

i) ‘local holding companies’ (or a ‘local holding company’) which are its 90% subsidiaries (see INTM255020 to INTM255050), or

ii) trading companies (or a trading company) which are 51% subsidiaries or, if not, are either ‘maximum permitted shareholding companies’ or ‘40/40’ controlled foreign companies (see below); or

  1. a company which would fall within (a) above if there were disregarded so much of its business as consists in the holding of the property or rights or any description, for use wholly or mainly by companies which it controls and which are resident in the territory in which it is resident.

‘Securities’ is not defined, and must be interpreted in accordance with its ordinary meaning of a debt or claim that is secured (i.e. the subject of a legally enforceable document). ‘Holding’ does not include dealing in securities, i.e. the regular acquisition and disposal of securities.

The meanings of the terms ‘90% subsidiary’ and ‘51% subsidiary’ are those found in CTA10/S1154 with the exception that a company will be a 51% subsidiary only if more than half of its ordinary share capital is directly owned by the holding company rather than owned directly or indirectly by the holding company.

The term ‘maximum permitted shareholding company’ above is non-statutory. It means a trading company in which the holding company holds the maximum amount of ordinary share capital which is permitted in the territory:

  • in which the trading company is resident; and
  • from whose laws the trading company has derived its status as a company.

If, for example, a holding company owns 35% of the ordinary share capital of a trading company incorporated and resident in a territory and that is the maximum amount which can be held under the laws of that territory by a company under foreign control, the trading company will be treated in the same position as a 51% subsidiary for the purposes of the exempt activities test.

The term ‘40/40’ controlled foreign company is similarly non-statutory. It means a company that is treated as a controlled foreign company solely because of the 40% test in ICTA88/S747 (1A) where the United Kingdom resident holding an interest of 40% or more in the controlled foreign company also controls the holding company in question. See definition in INTM254370.

A company may engage in activities other than the holding of shares or securities in the types of company specified above, provided that its business consists wholly or mainly in the holding of such shares or securities (or would so consist if the part of its business relating to the holding of property etc for use by its subsidiaries resident in its own territory of residence were disregarded). So, for example, the existence of some trading activity, shareholdings not of the type specified, (for example, in associated companies or dormant subsidiaries) or portfolio investments will not prevent the company from qualifying as a holding company, provided that its business consists wholly or mainly in the holding of shares or securities in the types of company specified at a) and b) above. ‘Wholly or mainly’ means more than 50% of the business.

It is recognised that there may be occasions where information about the Controlled Foreign Company may not be available or the time it would take to verify beyond any doubt that the Controlled Foreign Company satisfies all of the conditions for the exemption would be disproportionate. In these circumstances, see INTM256620 for further guidance.

The definition of a holding company is modified in relation to ‘local holding companies’, see INTM255020 to INTM255050.