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HMRC internal manual

International Manual

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

DRAWING - INTM255050D

Assumptions

All subsidiaries are 100% held.

All holding companies satisfy the requirements in ICTA88/SCH25/PARA6(1)(a) and (b) (business establishment and effective management).

Trading 1 - 8 are carrying on exempt activities.

The main business of Holdcos is as described.

Holdco 4

The main business of Holdco 4 is to hold the shares in Trading 6 - 8 which are all resident in the same territory as Holdco 4.

Holdco 4’s gross income is as follows

Dividends from Trading 6 - 8 90
   
Bank interest 10
  100

Since 90% of Holdco 4’s gross income is derived from its trading subsidiaries carrying on exempt activities Holding 4 is a local holding company.

Holdco 4 pays a dividend of 50 to Holdco 3.

Holdco 3

The main business of Holdco 3 is to hold shares in Holdco 4.

Holdco 3’s gross income is as follows

Dividend from Holdco 4 50
   
Dividend from Trading 5 100
Dividend from Investment 1 10
Bank interest 5
  165

90% of Holdco 3’s gross income is derived from companies which it controls and which are local holding companies or engaged in exempt activities. Holdco 3 is therefore an exempt holding company. Holdco 3 is also a superior holding company in that 90% of its income

  • represents qualifying exempt activity income of its subsidiaries (dividend from Holdco 4 (50) and Trading 5 (100), and
  • is derived directly from companies which it controls and which are not superior holding companies but are engaged in exempt activities.

Holdco 3 pays a dividend of 150 to Holdco 2.

Holdco 2

Holdco 2’s main business is holding shares in Holdco 3. It is not a holding company because its main business is not holding shares in local holding companies or trading companies.

Its main business is holding shares in Holdco 3, which is a holding company as defined by ICTA88/SCH25/PARA12(1). Holdco 2 therefore falls within the definition of a superior holding company under ICTA88/SCH25/PARA12A(1) - a company whose main business consists wholly or mainly in the holding of shares or securities of holding companies.

Holdco 2’s gross income is as follows

Dividend from Holdco 3 150
   
Dividends from Trading 3 and 4 70
Own bank interest 5
  225

90% of Holdco 2’s gross income is 203.

Does that 90% represent qualifying exempt activity income?

70 is received direct from exempt trading companies.

150 is received from Holdco 3. Since we cannot include holding company income (to avoid further dilution by investment income) we need to look through this to the income from exempt activities or exempt trading income or local holding companies.

Of the 150 from Holdco 3 100/165 x 150 (91) is received from Trading 5.

Of the 150 from Holdco 3 50/165 x 150 (45) is from a local holding.

The total qualifying exempt activity income is therefore 70+91+45 = 206. This is more than 90% of 225.

This income is all received directly or indirectly from companies which Holdco 2 controls, are local holding companies or exempt activity companies.

Does this income derive directly from companies which it controls?

The answer is ‘yes’.

Does it derive directly from companies which are either exempt trading companies (Trading 3 and 4) or superior holding companies which themselves pass the income test (Holdco 3).

The answer is ‘yes’.

Holdco 2 is therefore an exempt superior holding company.

Holdco 1

The main business of Holdco 1 is holding shares in Holdco 2. It is not a holding company because its main business is not holding shares in local holding companies or trading companies.

Its main business is holding shares in Holdco 2, which is a superior holding company as defined by ICTA88/SCH25/PARA12A(1). Holdco 1 therefore falls within the definition of a superior holding company under ICTA88/SCH25/PARA12A(1) - a company whose main business consists wholly or mainly in the holding of shares or securities of superior holding companies.

Holdco 1’s gross income is as follows

Dividend from Holdco 2 100
   
Dividends from Trading 1 and 2 50
Own bank interest 10
  160

90% of Holdco 1’s income is 144.

Does that 90% represent qualifying exempt activity income?

50 is received directly from exempt trading companies.

Of the 100 from Holdco 2 100/225x70 (31) is received from Trading 3 and 4.

100/225 x 150 (66) is received from Holdco 3 (a holding company). Since we cannot include holding company income (to avoid further dilution by investment income) we need to look through this to the income from exempt activities or exempt trading income or local holding companies. 150/165 of Holdco 3’s income will meet the test. That is 91%. So 91% of 66 (60)will meet the test.

The full exempt income is thus 50+31+60 = 141. Since this is less than 144 the test is failed and Holdco 1 is not an exempt superior holding company. Without the additional 10 bank interest the test would have been met.