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HMRC internal manual

International Manual

From
HM Revenue & Customs
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Controlled Foreign Companies: apportionment of chargeable profits and creditable tax: Example of relevant interests and interests by virtue of ordinary shares alone

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The relevant interests arise only through holding ordinary shares. Top Co, A Ltd and B Ltd are all United Kingdom resident companies. The other companies and Signor A are non-residents.

Top Co

Top Co has a ‘relevant interest’ under ICTA88/S752A(2) only in respect of 10% held directly (Rule 1). Its remaining interest does not represent a ‘relevant interest’ as it is held by virtue of other United Kingdom resident companies (ICTA88/S752A(3)).

A Ltd

A Ltd has a ‘relevant interest’ under ICTA88/S752A(2) as none of its interest is held by virtue of an interest in another United Kingdom resident company (Rule 1).

The fractional interest A Ltd has in C Inc. is 0.25 and that C Inc. has in E Inc. is 0.10 (i.e. A Ltd has a 25% interest in C Inc. which itself has a 10% interest in E Inc.). The product ‘P’ is therefore 0.025.

‘S’ is 90%, being the percentage of issued ordinary shares that E Inc., the lowest share-linked company, has in the controlled foreign company.

P x S therefore gives A Ltd a relevant interest of 2.25% (i.e. 90% x 0.10 x 0.25)

B Ltd

B Ltd has a ‘relevant interest’ under ICTA88/S752A(2) as none of its interest is held by virtue of an interest in another United Kingdom resident company (Rule 1).

B Ltd’s interest can be traced through a 75% interest in C Inc. and an 80% interest in D Inc. This requires two computations.

  • The first computation traces an interest through C Inc. The fractions B Ltd holds in C Inc. and C Inc. holds in E Inc. (both C Inc. and E Inc. are share-linked companies) are 0.75 and 0.10 respectively (i.e. B Ltd has an 75% interest in C Inc. which itself has a 10% interest in E Inc.),. The product ‘P’ is therefore 0.075 (0.75 x 0.10).

‘S’ is 90%, i.e. percentage of ordinary shares that E Inc., the lowest share-linked company, holds in the controlled foreign company.

P x S therefore gives a first relevant interest to B Ltd of 6.75%.

  • The second computation traces an interest through D Inc. The fractions here are 0.8 and 0.9 (i.e. B Ltd has an 80% interest in D Inc. which itself has a 90% interest in E Inc.), giving a product ‘P’ of 0.72.

E Inc. is still the lowest share-linked company and ‘S’ therefore remains at 90%.

P x S therefore gives a second relevant interest to B Ltd of 64.8%.

The total interest of B Ltd in the controlled foreign company is therefore 71.55% (i.e. 90% x 0.10 x 0.75 (6.75) by virtue of its holding in C Inc. and 90% x 0.9 x 0.8 (64.8%) by virtue of its holding in D Inc.).

C Inc.

C Inc. does not have a ‘relevant interest’ as the same interest is held by a United Kingdom resident company (Rule 1).

D Inc.

D Inc. does not have a relevant interest as to 80% of its interest in E Inc. as the same interest is held by a United Kingdom resident company (Rule 1). (It does not have a relevant interest in relation to the interest of Signor. A as his interest is indirectly held by another related person (E Inc.)) (ICTA88/S752A(5) (Rule 2).

E Inc.

E Inc. does not have a ‘relevant interest’ to the extent that United Kingdom companies hold the same interest indirectly and have a relevant interest (Rule 2). It does however have a relevant interest to the extent that part of its share capital is held by Signor A (ICTA88/S752A(4)) (Rule 3). ‘S’ remains at 90% while ‘P’ is 0.18 (0.2 x 0.9). The relevant interest is therefore 16.2% (i.e. 90% x 0.2 x 0.9).

Signor A

Signor A does not have a relevant interest in the controlled foreign company in that he is not a United Kingdom resident company, nor a related person nor does he have a direct interest in the controlled foreign company.

Total relevant interests are therefore:

Top Co 10%
   
A Ltd 2.25%
B Ltd 71.55%
E Inc 16.2%
  100%