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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing: legislation: rules: SMEs: associated entities

Linked enterprises

A linked enterprise is an enterprise which has the right to control the affairs of the enterprise seeking exemption (there is more detail in the EU’s SME User Guide, which can be accessed (as at February 2011) on the EU website). This control can be either direct or indirect and take many forms including shareholding, voting rights and contractual rights. As with many control tests, it will be possible for more than one enterprise or group of enterprises to control another at any one time. ‘Linked enterprises’ are enterprises which have any of the following relationships with each other:

  • an enterprise has a majority of the shareholders’ or members’ voting rights in another enterprise;
  • an enterprise has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another enterprise;
  • an enterprise has the right to exercise a dominant influence over another enterprise pursuant to a contract entered into with that enterprise or to a provision in its memorandum or articles of association;
  • an enterprise, which is a shareholder in or member of another enterprise, controls alone, pursuant to an agreement with other shareholders in or members of that enterprise, a majority of shareholders’ or members’ voting rights in that enterprise.

For the purposes of calculating the data for an enterprise, all data for any second enterprise that is linked to an enterprise must be aggregated as well as all the data for any linked enterprises or partnership enterprises of that second enterprise. All the staff, turnover and balance sheet entries must be taken into account regardless of the extent to which control is effected: the aggregation will be the same under 51% control as it would be under 100% control. For groups of companies this will have the effect of aggregating all data.

Partnership enterprises

Enterprises will be counted as partnership enterprises where one of them holds 25% or more of the capital or voting rights of the other but they are not linked enterprises. However where linked enterprises jointly hold rights these must be aggregated to see if the 25% threshold has been passed. This definition will include partnership enterprises in which an enterprise has invested as well as those which invest in it. The Commission recommendation does not separately define capital or voting rights. However as noted above these should be interpreted widely.

If an enterprise has partnership enterprises, a proportion of the data from those enterprises must be aggregated with those of the enterprise when considering the qualifying data. The data to be aggregated will be proportional to the percentage interest giving rise to the partnership relationship. However if those partnership enterprises have their own linked or partnership enterprises, the data from those enterprises must be aggregated first before applying the percentage holding.

Third party business creation investment

There are certain categories of investor who provide a positive role in business creation. The Commission recommendation recognises that there will be limited circumstances where an interest in a small enterprise should not result in the loss of its small or medium sized status. It identifies several groups which seek to make longer term returns (if any) from their non controlling investments in smaller businesses:

  • public investment corporations and venture capital companies;
  • individuals or groups of individuals with a regular venture capital investment activity who invest equity capital in unquoted businesses (‘business angels’), provided the total investment of those business angels in the same enterprise is less than €1,250,000;
  • universities or non-profit research centres;
  • institutional investors, including regional development funds;
  • autonomous local authorities with an annual budget of less than €10 million and fewer than 5,000 inhabitants.

“Venture capital” in this context includes private equity.

These groups are the only prescribed circumstances where ownership by a public body will not result in the loss of small or medium enterprise status.

These investment enterprises do not have to be taken into account as partnership enterprises. Additionally these enterprises will not constitute linked enterprises solely by reason of their ability to exercise a dominant influence by virtue of the terms of their investment, provided that they do not involve themselves directly or indirectly in the management of the enterprise. This treatment does not extend to cases where the investment enterprise is linked to the enterprises in which it had invested under the other tests detailed at the top of this page.

The recommendation does not provide additional definitions for these classes of investor. It is, however, necessary for there to be an investment business which regularly makes such investments in enterprises that would not otherwise be linked or partnership enterprises. A holding company or individual that seeks to make a return through controlled subsidiaries will not qualify.