EIS: income tax relief: the issuing company: issuing company to carry on the qualifying business activity requirement
At no time during Period B (see VCM10540) must relevant preparation work, the qualifying trade or relevant research and development be carried on by someone other the qualifying company or one of its qualifying 90% subsidiaries. But the rules do not act to deny relief where an existing trade is carried on by another company and the issue of shares is preparatory to the carrying of a qualifying trade by the qualifying company or one of its qualifying 90% subsidiaries. Neither do the rules act to deny relief in cases in which the qualifying company (or any other company) goes into liquidation, administration or receivership provided that these actions are entered into and carried out for bona fide reasons and that the relevant qualifying trade is not sold on a going concern basis to a person who was connected with the qualifying company during Period B.
This rule does operate to deny relief in cases where the relevant trade is being carried on by the company or a subsidiary in partnership. HMRC issued Revenue and Customs Brief 77/2009 (reproduced at VCM13150) to explain how this is to be regarded as taking effect for shares issued on or after 9 December 2009.
Meaning of ‘qualifying 90% subsidiary’
For a subsidiary to be a qualifying 90% subsidiary, the relevant company must:
- own at least 90% of the subsidiary’s issued share and voting rights.
- be beneficially entitled to at least 90% of the assets available for distribution to equity holders of the subsidiary
- be beneficially entitled to at least 90% of any profits of the subsidiary which would be available for distribution to equity holders (defined at CTA10/S158, see VCM11080).
In addition, no person other than the relevant company must have control of the subsidiary, and there must be no arrangements by virtue of which any of the above conditions could cease to be met.
From 6 April 2007 a company is still to be treated as a qualifying 90% subsidiary if it is held indirectly via a company which is a qualifying 100% subsidiary of the relevant company, (based on similar considerations to those above).
Arrangements for the disposal of the subsidiary do not prevent this test from being regarded as met, providing that the disposal is for genuine commercial reasons and not for the purposes of tax avoidance.
The winding up of a subsidiary, or the subsidiary entering into or being in administration or receivership, do not prevent this test from being regarded as met providing that those events take place for genuine commercial reasons and not for the purposes of tax avoidance.