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HMRC internal manual

International Manual

Controlled Foreign Companies: apportionment of chargeable profits and creditable tax: Interests other than by virtue of ordinary shares alone

ICTA88/S752(4)

Where the relevant interests in a controlled foreign company are not held solely by virtue of ordinary shares and in consequence ICTA88/S752(3) does not apply, the apportionment of chargeable profits and creditable tax for the relevant accounting period is to be made on a just and reasonable basis among the persons who have relevant interests in the company at any time in that period.

For a basis to be just and reasonable it should reflect the power the interest has to enjoy the income of the controlled foreign company either as a distribution or on a winding-up. The following general principles should be followed.

The total amount apportioned should not exceed the amount of the chargeable profits or creditable tax of the accounting period concerned.

Where shares of the same class are held by different persons during the accounting period the amounts apportioned to those persons in respect of those shares should be in direct proportion to the size of the holding and the number of days during the accounting period for which they are held.

The same principle as above should be applied where more than one person holds an interest of the same description in a controlled foreign company.

Where preference shares carry entitlement only to a dividend, then the apportioned profits will be the equivalent of the dividend only. Other rights (e.g. to convert) may attract a greater proportion of the profits.

Example 1

A controlled foreign company has two classes of shares, A shares and B shares. A shares are £1 ordinary voting shares and B shares £1 non-voting 9% preference shares with no rights in a winding-up. The whole of the 500 issued 9% preference shares are held by French resident individuals who are wholly unconnected with United Kingdom interests. The United Kingdom interests hold the whole of the 100 issued A shares. If the available profits of the controlled foreign company are 500 and the chargeable profits 700 HMRC would accept the following as a just and reasonable apportionment.

French residents 500 x 9% = 45   


United Kingdom shareholders 700 - 45 = 655  

Example 2

A controlled foreign company has two classes of shares, A shares and B shares. The A shares are ordinary voting shares. The B shares are non-voting 5% preference shares with the right to conversion into ordinary shares after 5 years. It would be proper here to apportion, in addition to 5% of the profits, a further amount to reflect the conversion element of the value of those shares discounted by an appropriate sum.

Other rights (e.g. an unattached right to acquire shares) may give rise to an apportionment. What is a just and reasonable apportionment will depend very much on the facts.

Business International will be happy to give guidance in any case where a company is uncertain about what would be accepted as just and reasonable. And companies can apply for a formal clearance if they wish.