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HMRC internal manual

International Manual

Distribution exemption: Anti-avoidance legislation: manipulation of controlled company rules

CTA09/S931J: schemes involving manipulation of controlled company rules

A distribution falls within an exempt class under CTA09/S931E provided that the payer is controlled by the recipient at the time the distribution is paid. This creates a risk that schemes might be set up whereby profits accrue during a period in which there is no control of the paying company, so there is no CFC defence against artificial diversion of profits, but the distribution is paid at a time when control by the recipient has been established.

CTA09/S931J is relevant only in those cases where a distribution is exempt solely by reason of S931E. If it is exempt under any other class, S931J will not prevent the distribution falling into that other class and so will not prevent it from being exempt.

Profits that arose in a period before the recipient controlled the payer (see S931E) are referred to as “pre-control profits”. However profits can only be pre-control profits if they arose in an accounting period that ended on or after 1 July 2008 (see the commencement rule in FA09/SCH14/PARA32(3)).

S931J applies only if two conditions are met.

  • There is a scheme that has as its main purpose, or one of its main purposes, to obtain exemption under S931E. See INTM654030 for further discussion of the purpose test in this section.
  • The distribution is paid in respect of pre-control profits.

Where S931J applies it has the effect of preventing a distribution from falling into an exempt class by virtue of S931E.

To establish whether a distribution is paid in respect of pre-control profits in a case where both pre-control profits and other profits exist (or have previously existed), it is necessary to consider whether that distribution and any earlier distribution paid after the pre-control profits arose fall into an exempt class by virtue of any section other than S931E.

Distributions that are exempt independently of S931E are treated as far as possible as paid in respect of profits other than pre-control profits, so cannot reduce the pool of pre-control profits while any other profits remain distributable.

Distributions that are exempt solely by reason of S931E are treated as far as possible as paid in respect of pre-control profits and so (if the purpose condition is also met) will fall within the scope of S931J and hence be taxable distributions.

Once all pre-control profits have been paid out in the above way, the section will cease to have any further application.

A distribution may be partly taxable and partly exempt if it is paid partly from pre-control profits and partly from other profits. In such a case it will be treated as two separate distributions for the purposes of both CTA09/Part 9A and for the purposes of giving double taxation relief.