Chapter 18 – Control etc
331.Chapter 18 defines “control” for the purposes of Part 9A. A CFC is defined (in section 371AA(3)) as a non-UK resident company which is controlled by a UK resident person or persons. A company can be controlled either by reference to legal or economic control or by reference to accounting standards.
332.New section 371RA provides an overview of the Chapter by outlining the main “control” tests and the different approach that is taken depending on which control test is being considered. New section 371RB and new section 371RE determine if a company is “controlled” by another person or persons whilst new section 371RC sets out a circumstance whereby a non-UK resident company will be taken to be a CFC when it would not otherwise be the case.
333.New section 371RB outlines how to determine if a company is controlled by a person through legal and economic “control”.
334.New subsection (1) introduces the “legal” test where a person controls a company if they have the power to secure that, directly or indirectly, the affairs of the company are conducted in accordance with their wishes through the possession of shares or voting powers in a company or powers conferred through articles of association or other documents that regulate a company.
335.New subsection (2) introduces the “economic” test where a person controls a company if it is reasonable to suppose that the person would receive (whether directly or indirectly) the majority of one or more of the following:
the disposal proceeds in the event of a disposal of the whole of the company’s share capital,
the income on a distribution if the whole of the company’s income was distributed, or
the company’s assets on a winding up or other circumstances,
whether at the time of the disposal, distribution or winding up, or at any later time.
336.The term “indirectly” means that one or more UK persons can control a CFC where one or more overseas companies or entities are interposed between the CFC and those persons.
337.However for the purposes of subsection (2), new subsection (3) provides that any rights which a person has as a “relevant bank” should be ignored.
338.New subsection (4) provides that share capital held by a “relevant bank” and rights to distributions or assets on a winding up held by a “relevant bank” are not included in the whole of the company’s share capital, distributable income and assets on a winding up when determining the amount that it is reasonable to suppose a person would receive under subsection (2). So if a bank owns 2 of the 100 ordinary issued shares in a CFC, those 2 shares are ignored in testing for control under subsection (2)(a). The test of whether a person would receive a majority of the proceeds of a disposal of the whole of the shares would be by reference to 98 shares rather than 100 and so a person owning 50 shares would receive a majority of the proceeds if those 98 shares were sold.
339.New subsection (5) defines a “relevant bank” as a bank carrying on a banking business (as defined at new section 371VA) which is regulated in the CFC’s territory of residence. Subsection (5)(b) however limits the exclusion for banks to cases where the bank is lending money to the CFC in the ordinary course of its business.
340.New subsection (6) makes it clear that references to a person receiving any proceeds, amounts or assets in subsections (2) and (4) include references to the proceeds, amounts or assets being applied directly or indirectly for their benefit.
341.New subsection (7) states that if two or more persons taken together meet the conditions of the tests at subsections (1) or (2) they will be taken to control the company. Those persons do not have to be connected. So if unconnected companies A and B both own 30 per cent of the voting shares of a CFC, then, taken together, they control the CFC.
342.New section 371RC introduces an alternative legal and economic control test (“the 40 per cent test”) of whether a company is a CFC. The test applies when two persons control a company and one of them is not resident in the UK. If a UK resident person has interests, rights and powers that represent at least 40 per cent of the holdings, rights and powers that give control of a company and a non-UK resident holds at least 40 per cent but not more than 55 per cent of the holdings, rights and powers, the company will be taken to be a CFC. This test will apply mainly to joint venture companies.
343.New section 371RD attributes various rights and powers to a person in order to determine whether a person or two or more persons control a company for the purposes of legal and economic control (including the 40 per cent test).
344.New subsections (2) and (3) provide that there should be attributed to each person (“P”) all the following rights and powers to the extent that they would not otherwise be attributed to that person:
rights and powers which P is entitled to acquire at a future date or will become so entitled to acquire at a future date;
rights and powers of other persons that fall within new subsection (4);
if P is UK resident, the rights and powers of other UK residents who are connected to P; and
rights and powers within new subsection (3)(d).
345.New subsection (3)(d) covers more complex circumstances where P is a UK resident person. It includes rights and powers which would, under subsection (2), be attributed to another UK resident person (identified as “Q”) who is connected to P on the assumption that “Q” were P. This covers situations where there are three persons (for example A, B and C) and A is connected to B and B is connected to C but A and C are not connected. In these circumstances any rights and powers of A are to be attributed to C and vice versa. This then extends to circumstances where there are more than 3 persons (say A to Z) and C is connected to D, D to E and so on forming a chain of connection. In these circumstances (and as long as the persons are UK resident) any rights and powers of any one person are to be attributed to each other.
346.New subsection (4) covers rights and powers so far as they are required or may be required to be exercised on behalf of P, under P’s direction or for P’s benefit. In the case of a loan made by one person to another, these are not limited to rights and powers conferred by the terms of any security relating to the loan.
347.New subsection (5) states that in subsections (3)(b) to (d) and subsection (4) references to rights and powers include rights and powers which the person is entitled to acquire at a future date or will, at a future date, become entitled to acquire.
348.New subsection (6) disapplies section 1122(4) of CTA 2010 (which is otherwise generally applied by new section 371VF(2)(b) for the purposes of Part 9A) when determining whether one person is connected with another for the purposes of section 371RD.
349.New subsection (7) provides that for the purposes of sections 371RB, and 371RC, references to rights and powers of a person or rights and powers which a person is or will become entitled to acquire include references to rights and powers that are exercisable jointly with one or more persons.
350.New section 371RE introduces ‘the accounting test’ of control that is based on Financial Reporting Standard 2 (“FRS 2”) issued and updated by the Accounting Standards Board in the UK. Under new subsection (1), for the purposes of Part 9A a person “P” controls a company at any time if P is the company’s “parent undertaking”. FRS 2 sets out the circumstances in which a parent undertaking must prepare consolidated financial statements, including the financial results of any “subsidiary undertaking”. It does not matter if P does not or is not required to prepare consolidated financial statements under FRS2; the section applies by testing whether there would be a parent/subsidiary relationship if P were to apply FRS 2. Both “parent undertaking” and “subsidiary undertaking” take their meaning from FRS 2.
351.However new subsection (2) provides a limitation that a company will not be taken as a CFC at the time in question under the accounting test unless the “50 per cent condition” is met at that time.
352.New subsection (3) sets out assumptions that should be made when determining whether the “50 per cent condition” is met. These are:
that the company is a CFC at that time;
that that time is itself an accounting period of a CFC; and
that section 371BC applies in relation to the assumed accounting period.
Thus, for the purpose of establishing whether the 50 per cent condition is met at a single point of time, there is an assumed CFC, an assumed accounting period consisting of that point in time, and an assumption that the CFC’s chargeable profits would be apportioned for that assumed accounting period.
353.New subsection (4) states that the 50 per cent condition is met if at the time in question the percentage of the CFC’s chargeable profits (as calculated using the assumptions in subsection (3)) which would be apportioned to P taken together with its UK resident subsidiary undertakings (if it has any) would be at least 50 per cent.
354.New section 371RF(1) provides that the Treasury may by regulations amend section 371RE to take account of the following:
any modification, amendment or revision of FRS2, or
any relevant document.
355.New subsection (2) defines “relevant document” as either a document that replaces FRS2 or a document which replaces, modifies, amends or revises a document that replaces FRS2 or a document that performs the same function on the latter document.
356.New subsection (3) provides that the Treasury may also by regulations make provision that corresponds to the accounting test in section 371RE and uses any other accounting standard dealing with consolidated financial statements, and which will apply instead of section 371RE to determine if a person “controls” a company where that person prepares or is required to prepare consolidated financial statements in accordance with that standard.
357.New subsections (4) and (5) allow the Treasury to provide by regulations that, if specified conditions are met, a company will not be taken to be a CFC by virtue of section 371RE (the “accounting standards” test) or any equivalent test provided by regulations under subsection (3) of section 371RF.
