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Finance Act 2012

Chapter 17- Apportionment of a CFC’s chargeable profits and creditable tax

314.New section 371QA introduces Chapter 17, which contains the rules for apportioning the CFC’s chargeable profits and creditable tax, for an accounting period, among the relevant persons for the purposes of step 3 in section 371BC(1).

315.New section 371QB contains provision about interpretation for the purposes of Chapter 17.

316.New subsection (2) applies the interpretation provisions contained in section 371OB to Chapter 17 in the same way as they apply to Chapter 15. These provisions largely deal with the meaning of direct and indirect interests in a company. They specify by whom an interest is treated as held when it is held in a trust.

317.New subsections (3) and (4) define “ordinary shares”. This is required for applying the first of the two basic apportionment rules in new section 371QC. It means, for any company, shares of a single class (however described) which is the only class of share issued by the company. The term “share” can also refer to a fraction of a share. Shares issued by a company belong to different classes if they are paid up to different amounts.

318.New subsection (5) describes when a person ‘indirectly’ holds ordinary shares in a CFC. This occurs when the person directly holds shares in a company “share-linked” to the CFC. The expression “share-linked” is defined in new subsection (6); it essentially means the holding of ordinary shares in the CFC via a chain of companies. The companies in the chain are the “intermediate interest” holders, defined in new section 371QC(6).

319.New section 371QC gives the two basic rules for how an apportionment of chargeable profits should be calculated. New section 371QD provides how an apportionment is to be made under the first basic rule and sections 371 QE and 371QF elaborate upon that rule. Section 371QD, which applies if certain conditions are met, involves a formulaic approach that requires the multiplying together of indirect interests in the CFC through the chain of companies to arrive at the apportionment percentage. If there is more than one chain leading to the same CFC then the relevant interests through each chain are aggregated. If the conditions for the formulaic approach are not met then, under the second basic rule, a just and reasonable approach is to be applied.

320.There are 3 conditions set out in new sections 371QC(3) to (5) that must be met for the formulaic approach in new section 371QD to apply:

  • Condition X is satisfied if the relevant persons have relevant interests in the CFC only by direct or indirect holding of ordinary shares in that CFC;

  • Condition Y is satisfied if each of the relevant persons has been either only UK resident, or only non-UK resident, throughout the accounting period; and

  • Condition Z is satisfied provided that any company with an intermediate interest in the CFC only has that interest from holding, directly or indirectly, ordinary shares in the CFC.

321.Where the conditions are met section 371QD applies to apportion chargeable profits and creditable tax to the relevant persons in proportion to their ordinary shareholdings in the CFC.

322.New section 371QD(4) provides that new section 371QE “Indirect shareholdings” and new section 371QF “Variable shareholdings” supplement the application of section 371QD.

323.New section 371QE explains how to calculate the percentage of a CFC’s issued shares that a relevant interest holding’s indirect interest represents. The calculation is illustrated in the following examples, in which the terms ‘P’ and ‘S’ take the meanings given in new section 371QE(2).

  • Example 1 – indirect shareholdings single chain

    Relevant person A owns 80 per cent of the shares in overseas company B, which in turn holds 90 per cent of the shares in overseas company C, which in turn holds 90 per cent of the issued ordinary shares in the CFC.

    The fractional interest A has in B is 0.80 and the fractional interest B has in C is 0.90. As C directly holds shares in the CFC its fractional interest is not counted. P is the product of the two fractions: 0.80 x 0.90 = 0.72.

    S is 90 per cent, which is the percentage of the issued ordinary shares that A holds indirectly – it is the proportion of the issued shares held by C.

    A’s relevant interest therefore represents the percentage of the CFC’s issued share capital given by multiplying P and S. Hence the percentage is 0.72 x 90%, which is 64.8 per cent.

324.New section 371QE(4) provides the process for determining the relevant interest where the relevant person holds more than one indirect holding of ordinary shares in the CFC. In that case the formula ‘P x S’ in new subsection (2) is applied to each holding and then the results of each calculation are aggregated.

  • Example 2 – indirect shareholdings multiple chains

    Relevant person A has a relevant interest of 64.8 per cent through one indirect holding in the CFC. A also owns 75 per cent of the shares in overseas company D, which in turn holds the remaining 10 per cent of the issued ordinary shares in the CFC.

    The fractional interest A has in D is 0.75 and D holds 10 per cent of the shares in the CFC. As D directly holds shares in the CFC its fractional interest is not counted. P is therefore 0.75 and S is 10 per cent. The formula ‘P x S’ in subsection (2) gives the percentage 0.75 x 10% = 7.5%.

    A’s relevant interest therefore represents the percentage of the CFC’s issued share capital give by the sum of the two percentages 64.8 per cent and 7.5 per cent, which is 72.3 per cent.

325.New section 371QF applies to determine the percentage of issued ordinary shares that the relevant person’s relevant interest represents, where that percentage holding varies during the accounting period. The relevant interest is to be the sum of the relevant percentages for each holding period. So if during the accounting period the amount of a relevant person’s relevant interest changes three times, then the overall relevant interest for the accounting period is found by adding together the relevant percentage calculated for each of the three periods.

326.The relevant percentage for a holding period is given by multiplying the percentage holding in that period by the length of the holding period and dividing by the length of the accounting period.

  • Example 3 – variable shareholdings

    Company A holds 60 per cent of the CFC’s issued ordinary shares as a relevant interest during the first 100 days of the accounting period and 80 per cent during the remaining 265 days of the accounting period.

    The percentage of the CFC’s issued share capital that A’s relevant interest represents in the accounting period is the sum of the relevant percentages for the two holding periods:

    Holding period 1: relevant percentage is 60% x 100/365 = 16.4%.

    Holding period 2: relevant percentage is 80% x 265/365 = 58.1%.

    The percentage of the CFC’s issued share capital that A’s relevant interest represents in the accounting period is 16.4 per cent plus 58.1 per cent, which is 74.5 per cent.

327.New section 371QG provides a targeted anti-avoidance rule (TAAR) for the apportionment provisions.

328.New subsection (1) applies the section in relation to a CFC’s accounting period where an arrangement is entered into at any time, the main purpose or one of the main purposes of which is to obtain for any person a tax advantage under section 1139(2)(da) of CTA 2010 for that accounting period or any other accounting period of the CFC. A tax advantage under section 1139(2)(da) of CTA 2010 is the avoidance or reduction of a charge or assessment to the CFC charge under Part 9A.

329.New subsection (2) provides that where an arrangement, as defined in subsection (1), is in existence, the CFC’s chargeable profits and creditable tax for the accounting period are to be apportioned on a just and reasonable basis rather than on the basis of the mechanical rule if that rule would otherwise apply.

330.New subsection (3) states that in applying subsection (2) (i.e. apportioning the CFC’s chargeable profits and creditable tax on a just and reasonable basis) the apportionment must counteract the effects of the arrangement so far as it is practicable to do so.

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