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Finance Act 2012

Chapter 15 – Relevant Interests in a CFC

294.New section 371OA introduces Chapter 15 which applies for the purposes of determining the persons who have “a relevant interest” in a CFC at step 1 in subsection 371BC(1). The purpose of the “relevant interest” rules is to work out which UK persons have an interest in a CFC and how much that interest is. The chargeable profits of a CFC are apportioned between the relevant interest holders provided they are UK resident companies and hold a certain proportion of the total interest in that CFC. Not all persons with an interest in a CFC have a relevant interest. For example, if two UK companies have an interest in a controlled foreign company because one holds the shares directly and the other holds the shares in that UK company only the first UK company will hold the relevant interest.

295.New section 371OB contains provisions for the purposes of interpreting the Chapter.

296.New subsection (2) defines the term “indirect” and “direct” for the purposes of determining interests in a company. An indirect interest in a company exists where a person has an interest by virtue of having an interest in another company. It follows that a person who has an interest in the first company other than through another company has a direct interest in that first company.

297.New subsections (3) and (4) cover situations where an interest in the CFC is held by an Authorised Investment Fund (“AIF”). This is covered under two separate subsections because an AIF may take the form of a company or a trust. Both subsections have the effect of ensuring that for the purposes of determining the relevant interests the persons with an interest in the CFC are the share or unit holders in the AIF. The effect is to look through the AIF so that the AIF itself cannot be regarded as holding a relevant interest while ensuring that the underlying investors will.

298.New subsection (5) applies in a similar manner to the rules on AIFs so that where a bare trustee or nominee holds an interest for a person or persons, that person or persons (rather than the trustee or nominee) are treated as holding the interest.

299.New subsection (6) defines the term “bare trustee”.

300.New subsections (7) and (8) apply in a case not covered by subsection (5) where an interest is held in a fiduciary or representative capacity and there are one or more identifiable beneficiaries. In these circumstances the interest is treated as held by that beneficiary or, if there is more than one beneficiary, the interest is apportioned between them on a just and reasonable basis.

301.New section 371OC determines when a UK company’s interest will not be taken to be a relevant interest in a CFC. This will be where the UK company’s interest is an indirect interest in the CFC which it holds by virtue of holding an interest in another UK resident company.

302.New section 371OD prevents an certain interest held by a person that is not a UK resident company (the ‘related person’) from being a relevant interest. It applies where there is a UK resident company (‘UKRC’) that also holds an interest in the CFC and:

  • the related person holds its interest by virtue of its interest in UKRC (subsection (3)); or

  • UKRC holds its interest by virtue of an interest in the related person (subsection (4)).

In either of these cases, the related person’s interest is not a relevant interest. The effect of this is that UKRC’s interest takes priority over the related person’s interest in these circumstances.

303.An example of how the rule at subsection (4) will operate is that if company A, an overseas company, holds a 100 per cent direct (or indirect) interest in a company B, a UK resident company, and in turn B has a 100 per cent interest in company C, a CFC, then both A and B will have an interest that would without this subsection be a relevant interest. However, subsection (4) operates to prevent A’s interest being treated as a relevant interest because it is held only by virtue of B’s interest, which is the relevant interest.

304.The operation of the rule at subsection (5) can be illustrated by considering a reversal of the scenario described above. So in this instance B (the UK resident company) holds an interest in A (the overseas company) who has an interest in C (the CFC), with all interests being 100 per cent. In this scenario subsection (5) will operate to ensure that the interest of A is not a relevant interest and the interest of B will be the only relevant interest in the chain.

305.New section 371OE addresses interests held by any person other than a UK resident company. This is set out within new subsection (1) which states that the section only applies in a case where a person (“P”) has a direct interest in a CFC which is not a relevant interest by virtue of sections 371OC or 371OD.

306.New subsection (2) provides that P’s direct interest is a relevant interest for the purposes of this section unless new subsection (3) applies to it. That subsection applies to P’s direct interest so far as it is the same as another person’s relevant interest in the CFC which they have indirectly because they have an interest in P.

307.New subsection (4) defines the reference in subsection (3) to “another person’s relevant interest” as being a person’s relevant interest by virtue of sections 371OC or 371OD. This has the effect that P’s interest under this section will only be a relevant interest if it is a direct interest in the CFC that is not otherwise a relevant interest of a person related to a UK resident company or UK resident company by virtue of their own indirect interest.

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