MTT45130 - Particular entities and adjustments: Investment entities: Further adjustments required to adjusted profits and covered taxes

An adjustment may be required when calculating the top-up amount of an investment entity where an election applies in relation to an ownership interest in the entity, or where ownership interests in the entity are held by a person that is not a member of the group.

There are two types of adjustment that may be required, which are:

  • external holding adjustments, and
  • election adjustments.

The relevant rules are set out in section 223 of Finance (No.2) Act 2023.

Conditions

An external holding adjustment is required if:

  • a person that is not a member of the group has ownership interests in an investment entity (see MTT17030), and
  • a tax transparency election does not apply in relation to the investment entity.

An election adjustment is required if:

  • a tax transparency election applies in relation to an investment entity, or
  • a taxable distribution method election applies in relation to the investment entity.

See MTT45160 for guidance on the tax transparency election.

Adjustment to be made

Where an adjustment is required, the adjusted profits, substance based income exclusion amount, and covered tax balance of the investment entity are each reduced by a percentage (the ‘adjustment factor’).

The adjustment factor is different for each of the two types of adjustment.

Both types of adjustment required

Note that, where both an election adjustment and an external holding adjustment are required, the external holding adjustment must be made first.

Amount allocated to investment entity in relation to a CFC regime

Where the covered tax balance of an investment entity includes an amount allocated to it in relation to a controlled foreign company regime (see MTT25500), that amount is to be disregarded for the purpose of either type of adjustments.

Adjustment factor

To determine the adjustment factor for an external holding adjustment, divide:

  • the amount of profits of the investment entity that are attributable to ownership interests held by persons that are not members of the group (excluding interests in respect of which an amount has been excluded from the member‘s adjusted profits), by
  • the adjusted profits of the investment entity (determined in accordance with the rules at MTT21000+, and ignoring any further adjustments required under section 223).

If the entity has no adjusted profits, the adjustment factor is nil.

To determine the adjustment factor for an election adjustment, divide:

  • the amount of profits of the investment entity that are attributable to ownership interests held by the owners in relation to which a relevant election has been made (excluding interests in respect of which an amount has been excluded from the member‘s adjusted profits), by
  • the total amount of profits of the investment entity attributable to ownership interests held by members of the group.

If no profits are so attributable, the adjustment factor is nil.

Determining the amount of profits attributable to an ownership interest

The amount of profits attributable to an ownership interest is determined by the same method as is used when determining the inclusion ratio (see “Attribution of adjusted profits”, MTT61060).

Amendment in Finance Act 2025

Section 223 was amended by FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT09490).