Chapter 5: Demergers
Overview
3131.This Chapter rewrites the provisions concerning exempt distributions and chargeable payments in sections 213 to 218 of ICTA.
Section 1073: Key terms etc
3132.This section provides signposts to the key terms used in this Chapter, and to the reference to chargeable payment in section 1028. It is new.
Section 1074: Purpose of provisions about demergers
3133.This section explains the purpose of the rules concerning demergers and explains what provisions are included within the term “the provisions about demergers”. It is based on section 213(1) of ICTA.
Section 1075: Exempt distributions
3134.This section states that an exempt distribution is not a distribution for the purposes of the Corporation Tax Acts, and provides a signpost to the categories of exempt distribution set out in the following three sections. It is based on sections 213(2) and (3), 213A(1) and (2) and 218(1) of ICTA.
Section 1076: Transfer of shares in subsidiaries to members
3135.This section defines the circumstances giving rise to the first type of exempt distribution. It is based on section 213(2) and (3) of ICTA.
3136.Conditions A to D are in section 1081, conditions E and F are in section 1082 and conditions L and M are in section 1085.
Section 1077: Transfer by distributing company and issue of shares by transferee company
3137.This section defines the circumstances giving rise to the second type of exempt distribution. It is based on section 213(2) and (3) of ICTA.
3138.Conditions A to D are in section 1081, conditions G to K are in section 1083 and conditions L and M are in section 1085.
Section 1078: Division of business in a cross-border transfer
3139.This section defines the circumstances giving rise to the third type of exempt distribution. It is based on section 213A(1) of ICTA.
Section 1079: “The distributing company”
3140.This section defines the term “the distributing company” for the purposes of sections 1080 to 1099. It is based on sections 213(3) and 213A(3) of ICTA.
Section 1080: Meaning of “relevant company”
3141.This section defines the term “relevant company” for the purposes of sections 1076, 1077 and 1078. It is based on sections 213(3) and 213A(3) of ICTA.
Section 1081: General conditions
3142.This section sets out the conditions (A to D) for an exempt distribution to be treated as such, and covers all exempt distributions of the first or second type – see sections 1076 and 1077. It is based on section 213(4), (5), (10) and (11) of ICTA.
3143.Subsection (1) reflects the amendment of section 213(4) of ICTA by the Corporation Tax (Implementation of the Mergers Directive) Regulations 2009 (SI 2009/2797). The regulations substituted the words “resident in a memberState” for the words “UK resident” to ensure that the United Kingdom is fully compliant in this context with its obligations under Directive 90/434/EEC of the European Council on cross-border mergers etc of limited liability companies.
3144.The section is supplemented by sections 1082 and 1083 which set out conditions that must be met in relation to specific types of exempt distribution.
Section 1082: Conditions for distributions within section 1076(a)
3145.This section supplements section 1081 by requiring additional conditions (E and F) to be met if the exempt distribution is of a type involving the distribution by a company to its members of shares in one or more of its 75% subsidiaries. It is based on section 213(6), (7) and (12) of ICTA.
3146.Subsection (1) sets out conditions relating to the company whose shares are transferred and subsection (2) sets out conditions relating to the company making the transfer.
3147.Condition F in subsection (2), the requirement for the company making the transfer to be a trading company after the distribution, does not apply if that company is itself a 75% subsidiary. Instead, section 1085 applies.
Section 1083: Conditions for distributions within section 1077
3148.This section supplements section 1081 by requiring additional conditions (G to K) to be met if the exempt distribution consists of the transfer of a trade or trades, or shares in one or more 75% subsidiaries, followed by the issue of shares in the receiving company to the members of the company making the transfer. It is based on section 213(8) of ICTA.
3149.The company making the transfer must dispose of substantially the whole of its interest in the trade or shareholding that it transfers.
3150.Section 1084 further qualifies this section.
Section 1084: Cases where condition K does not apply
3151.This section qualifies section 1083 by setting out circumstances where one of its conditions, condition K, does not apply. It is based on section 213(9) and (12) of ICTA.
Section 1085: Conditions to be met if the distributing company is a 75% subsidiary
3152.This section applies instead of either condition F in section 1082 or condition K in section 1083 if the distributing company is itself a 75% subsidiary. It is based on section 213(12) of ICTA.
3153.Without this section a 75% subsidiary would not be able to meet the overarching requirement in section 1074(1), namely that the outcome of an exempt distribution is that a trade must be divided between two companies not in the same group or two independent groups. The categories of exempt distribution all involve transfers of shares to the members of the distributing company, and in the case of a 75% subsidiary the members would be the immediate holding company. Hence the conditions could not be met as everything would remain within the one group.
3154.The “trading company or group” condition in condition F or K of the relevant section is replaced by a requirement in subsection (1)about the group to which the company belongs.
3155.This section then requires further distributions, each of which must meet all the relevant tests – apart from condition F or K where the distributing company is a 75% subsidiary. The final exempt distribution in this process must therefore be made by a company which is not itself a 75% subsidiary and which is capable of meeting the requirements of section 1074(1).
Section 1086: Chargeable payments connected with exempt distributions
3156.This section sets out how a chargeable payment is charged to corporation tax or income tax, together with the condition that the charge only applies where the payment is made within five years after an exempt distribution. It is based on sections 214(1), (1A), (1B), and (6) and 215(4) of ICTA.
Section 1087: Chargeable payments not deductible in calculating profits
3157.This section sets out the corporation tax treatment for the payer of a chargeable payment made within five years after an exempt distribution. It is based on section 214(1) of ICTA.
3158.The chargeable payment is treated as a distribution for corporation tax purposes in the case of the payer. That is, the payer does not get a deduction for the payment. If the recipient is a company it is chargeable to corporation tax on the receipt – see section 1086 – despite the treatment in the hands of the payer as a distribution.
Section 1088: Meaning of “chargeable payment”
3159.This section sets out four conditions A to D, all of which must be met for a payment to be treated as a chargeable payment. It is based on section 214(2) and (3) of ICTA.
3160.This section is supplemented by section 1089 if any company concerned in the exempt distribution is an unquoted company.
Section 1089: Meaning of “chargeable payment”: unquoted companies
3161.This section expands the circumstances in which Condition A in section 1088 is met if a company concerned in an exempt distribution is an unquoted company. It is based on section 214(2) and (3) of ICTA.
3162.The section sets out conditions B1, C1 and D1. These are the parallel conditions to conditions B, C and D of section 1088. They have been given different but related labels to highlight the relationship.
Section 1090: Meaning of “company concerned in an exempt distribution”
3163.This section defines the term “company concerned in an exempt distribution” for the purposes of the Chapter. It is based on section 214(4) and (5) of ICTA.
3164.This term is used in the conditions in section 1088 and the extension in section 1089.
Section 1091: Advance clearance of distributions
3165.This section allows a company to seek a ruling from the Commissioners for HMRC as to whether a distribution is treated as an exempt distribution. It is based on section 215(1) of ICTA, and is supplemented by section 1093.
3166.The words “the Commissioners for Her Majesty’s Revenue and Customs” have been substituted for the words “the Board” in the source legislation. This gives effect to section 50(1) and (2) of CRCA which require references to the terms in the source legislation to be taken as references to the substituted terms.
Section 1092: Advance clearance of payments
3167.This section provides companies with an opportunity to seek advance clearance that a payment is not treated as a chargeable payment. It is based on section 215(2) and (3) of ICTA.
Section 1093: Requirements relating to applications for clearance
3168.This section sets out how an application under section 1091 or section 1092 must be made and the time limits that must be observed by the Commissioners and the company. It is based on section 215(5) of ICTA.
Section 1094: Decision of the Commissioners or tribunal
3169.This section sets out the time limit in which the Commissioners must make a decision on an application under section 1091 or section 1092 and the process for referring the application to the tribunal. It is based on section 215(6) to (8) of ICTA.
Section 1095: Exempt distributions: returns
3170.This section requires a company to make a return of an exempt distribution. It is based on section 216(1) of ICTA.
Section 1096: Chargeable payments etc: returns
3171.This section requires returns to be made in relation to chargeable payments connected with an exempt distribution. It is based on section 216(2), (3) and (4) of ICTA.
Section 1097: Information about person for whom a payment is received
3172.This section enables an officer of Revenue and Customs to require certain information of a person who receives a chargeable payment on behalf of another person, or the person on whose behalf it is received. It is based on section 217(4) of ICTA.
Section 1098: “Unquoted company”
3173.This section defines “unquoted company” for the purposes of the Chapter. It is based on section 218(1) of ICTA.
Section 1099: Other definitions etc
3174.This section contains further interpretation for the purposes of the Chapter. It is based on section 218(1), (2) and (3) of ICTA.
