Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
, see all updates

Controlled Foreign Companies: exemptions - Exempt Activities Test ('EAT'): Ascertaining the source of income paid to a superior holding company

ICTA88/SCH25/PARA12A(3)

Under the income test for superior holding companies income must be traced through intermediate companies in order to ascertain whether it represents income from exempt trading companies or companies engaged in exempt activities. TIOPA10/S57 and S58 (previously ICTA88/S799) provide the rules to ascertain the profits out of which dividends are paid. Prior to changes made in FA00, this meant that, broadly, dividends were considered to be paid out of the profits of any specified period or, where no period was specified, out of profits that were specified. Where a dividend is paid neither for a specified period nor out of specified profits, the dividend was considered to be paid out of the profits for the last period for which accounts were produced which ended before the dividend became payable. It is a question of fact what the source of the profits is. Where a holding company receiving only interest or royalties from its exempt trading subsidiaries pays a dividend out of that income to its own holding company the dividend will derive from exempt trading companies.

The changes to ICTA88/S799 made by FA00 mean, in particular, that where a company pays a dividend out of specified profits, then for claims made on or after 31 March 2001, TIOPA10/S57 and S58 (ICTA88/S799) no longer follow the specification for double taxation relief purposes. This will have a knock-on effect for the income test for superior holding companies. From 31 March 2001, unless a dividend is paid for a specified period, it will be considered to have been paid out of the profits for the last period for which accounts were produced which ended before the dividend became payable.

The following questions should be considered when deciding whether a superior holding company satisfies the income test.

Does 90% of the superior holding company’s income represent qualifying exempt activity income? This is income which is directly or indirectly derived from companies which

  • it controls
  • are not holding companies (but may be local holding companies)
  • are not superior holding companies
  • are exempt activity or exempt trading companies.

If the answer is ‘yes’ continue. If the answer is ‘no’ the test is failed.

Does that income derive directly from companies which the superior holding company controls?

If the answer is ‘yes’ continue. If the answer is ‘no’ the test is failed.

Is that income derived directly from companies which are:

  • engaged in exempt activity (but are not superior holding companies), or
  • exempt trading companies, or
  • superior holding companies which themselves pass the income test?

If the answer is ‘yes’ the test is passed.

The ‘gross income’ of a holding company is computed in accordance with INTM255000. See also INTM255010 which deals with certain income which is not to be treated as derived from subsidiaries.