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HMRC internal manual

International Manual

Distribution exemption: Exemption for all other companies: relevant profits

Profits that are relevant profits for the purposes of CTA09/S931H

In order to determine whether profits earned by a company are relevant profits, it is necessary to consider the transactions that gave rise to the profits. Profits are relevant profits unless the transactions (or the series of transactions) giving rise to them:

  • achieved a reduction in UK tax other than a negligible reduction; and
  • had as their main purpose, or one of their main purposes to achieve the UK tax reduction.

There is a UK tax reduction if the profits derive from transactions that directly or indirectly give rise to payments that are tax deductible for UK tax purposes. This may be the case even if the deduction achieves no immediate tax reduction for the payer. This will also be the case if a tax reduction arises to some other person (in the same or a different period), for example in consequence of loss relief or group relief.

There is also a UK tax reduction if the transaction or series of transactions has the effect of preventing a taxable receipt arising in any company. For example, a transfer of intellectual property from one company to another achieves a UK tax reduction if royalties that would otherwise have been received and subjected to UK tax in the first company are instead received by the other company.

There is not a UK tax reduction for the purposes of CTA09/S931H if the company making the distribution is subject to UK tax to the same extent as the total tax reductions achieved by other companies as a result of the transactions.

Unlike with the so-called “motive test” which applies to controlled foreign companies, there is no need to consider for the purposes of S931H whether the company paying the distribution exists for the reason of achieving a UK tax reduction. There will not be a UK tax reduction for S931H purposes solely because the transactions give rise to tax reductions outside the UK. That remains the case irrespective of whether the company making the distribution might (in the absence of tax considerations) have been expected to be UK resident.

It is only transactions that give rise to profits in the company making the distribution that need to be taken into account. The making of an equity investment is not a transaction that gives rise to profits and so it is not necessary to consider any tax deductible expenses that may be associated with an equity investment.