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HMRC internal manual

International Manual

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

Operation of the purpose test

CTA09/S931J can apply only where a dividend is paid as part of a scheme that has as one of its main purposes to achieve exemption under CTA09/S931E.

This section will not apply where:

  • There is an acquisition of a previously unconnected company for wholly commercial reasons, irrespective of whether or not the CFC legislation would have applied to the company being acquired (or one of its subsidiaries).
  • The section will also not apply solely because of an intra-group reorganisation that is undertaken for reasons wholly unrelated to exemption under S931E.

Examples of where this section will apply include:

  • A foreign owned group brings a subsidiary previously held by the parent jurisdiction into UK control in order to obtain exemption for a dividend that would otherwise have been taxable.
  • A UK or foreign group acquires rights that have the effect of temporarily bringing a subsidiary of an unconnected group within the scope of the CFC control rules for a short period while a preference dividend is paid as part of an avoidance scheme.