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526 | Non-qualifying shares |
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(1) | This section applies to the share held by the investing company if— |
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(a) | it is a non-qualifying share (see subsection (2)), |
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(b) | it does not fall to be treated for the accounting period in question as if |
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it were rights under a creditor relationship of the company because of |
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section 490 (holdings in OEICs, unit trusts and offshore funds treated |
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as creditor relationship rights), and |
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(c) | section 130 (traders receiving distributions etc) does not apply in |
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relation to distributions in respect of the share. |
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(2) | A share is a non-qualifying share for the purposes of this section if one or more |
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of the following conditions is met— |
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(a) | the increasing value condition, |
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(b) | the redemption return condition, and |
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(c) | the associated transactions condition. |
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“the increasing value condition” has the meaning given in section 527, |
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“the redemption return condition” has the meaning given in section 529, |
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“the associated transactions condition” has the meaning given in section |
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527 | The increasing value condition |
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(1) | The increasing value condition is that the assets of the issuing company are of |
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such a nature that the fair value of the share— |
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(a) | is likely to increase at a rate which represents a return on an investment |
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of money at a commercial rate of interest, and |
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(b) | is unlikely to deviate to a substantial extent from that rate of increase. |
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(2) | Fluctuations in value resulting from changes in exchange rates are ignored for |
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the purposes of subsection (1). |
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(3) | The increasing value condition is not met if— |
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(a) | the whole of the assets of the issuing company are income-producing |
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(b) | substantially the whole of them are income-producing on the basis of a |
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calculation of their fair value. |
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(4) | The assets which are “income-producing” for the purposes of this section are— |
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(a) | any share to which section 524 applies, |
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(b) | any share as respects which the increasing value condition is met or |
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would be met apart from subsection (3), |
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(c) | any share as respects which the condition in section 529(1)(b) is met, |
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(d) | any share as respects which the associated transactions condition is |
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(e) | any asset of a description specified in any paragraph of section 494(1) |
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(meaning of “qualifying investments”), |
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(f) | rights under a creditor repo within the meaning of section 543, |
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(g) | any share in a company— |
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(i) | the whole of whose assets are assets within paragraphs (a) to (f), |
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(ii) | substantially the whole of whose assets are such assets on the |
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basis of a calculation of their fair value. |
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(5) | For the purposes of subsection (1), it is assumed that no transaction (or series |
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of transactions) intended to prevent either of the conditions in subsection (1) |
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from being met will be or has been entered into. |
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528 | Regulations about income-producing assets |
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(1) | The Treasury may by regulations amend section 527 for the purpose of adding |
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to the assets which are income-producing for the purposes of that section. |
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(2) | The regulations may provide that they have effect in relation to accounting |
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periods ending on or after the day on which the regulations come into force. |
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529 | The redemption return condition |
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(1) | The redemption return condition is that the share— |
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(a) | is redeemable (see subsection (2)), |
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(b) | is designed to produce a return which equates, in substance, to the |
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return on an investment of money at a commercial rate of interest, and |
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(c) | is not an excepted share (see section 530). |
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(2) | For the purposes of this section, a share is regarded as redeemable only if it |
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meets condition A, B or C. |
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(3) | Condition A is that it is redeemable as a result of its terms of issue (or any |
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collateral arrangements)— |
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(a) | requiring redemption, |
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(b) | entitling the holder to require redemption, or |
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(c) | entitling the issuing company to redeem. |
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(4) | Condition B is that there are arrangements which will or might entitle the |
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investing company to qualifying redemption amounts. |
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(5) | In subsection (4) “qualifying redemption amounts” means amounts which, |
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when taken together, are the same, or substantially the same, as an amount |
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which might be payable on the redemption of the share. |
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(6) | Condition C is that it is reasonable to assume that the investing company will |
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or might become entitled to qualifying redemption amounts. |
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(7) | For the purposes of this section— |
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(a) | “arrangements” includes any agreement or understanding, and |
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(b) | it does not matter whether or not the agreement or understanding— |
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(i) | is legally enforceable, or |
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(ii) | forms part of the share’s terms of issue. |
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530 | The redemption return condition: excepted shares |
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(1) | A share is an “excepted share” for the purposes of section 529 if— |
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(a) | it is a qualifying publicly issued share (see subsections (2) and (3)), |
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(b) | it is a share which mirrors a public issue (see subsections (4) and (5)), or |
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(c) | the investing company’s purpose in acquiring the share is not an |
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unallowable purpose (see section 531). |
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(2) | A share is a “qualifying publicly issued share” for the purposes of this section |
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(a) | it was issued by a company as part of an issue of shares to persons not |
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connected with the company, and |
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(b) | less than 10% of the shares in that issue are held by the investing |
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company or persons connected with it. |
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(3) | But a share is not a qualifying publicly issued share for those purposes if the |
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investing company’s purpose in acquiring the share is an unallowable purpose |
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because of section 531(1)(a). |
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(4) | The first case where shares (“the mirroring shares”) mirror a public issue is |
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(a) | a company (“company A”) issues shares (“the public issue”) to persons |
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not connected with the company, |
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(b) | within 7 days of that issue, one or more other companies (“companies |
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BB”) issue the mirroring shares to company A on the same terms as the |
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public issue or substantially the same terms, |
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(c) | company A and companies BB are associated companies (see |
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(d) | the total nominal value of the mirroring shares does not exceed the |
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nominal value of the public issue. |
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(5) | The second case where shares (“the second-level mirroring shares”) mirror a |
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public issue is where, in the circumstances of the first case— |
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(a) | within 7 days of the public issue, one or more other companies |
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(companies CC) issue the second-level mirroring shares to one or more |
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of companies BB on the same terms as the public issue or substantially |
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(b) | company A, companies BB and companies CC are associated |
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(c) | the total nominal value of the second-level mirroring shares does not |
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exceed the nominal value of the public issue. |
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(6) | For the purposes of this section companies are associated companies if they are |
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members of the same group of companies for the purposes of Chapter 4 of Part |
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10 of ICTA (group relief) (see section 413(3)(a) of that Act). |
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531 | The redemption return condition: unallowable purposes |
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(1) | For the purposes of section 530, a share is acquired by the investing company |
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for an unallowable purpose if— |
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(a) | the purpose for which the company holds the share or one of the main |
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purposes is to circumvent section 130 (traders receiving distributions |
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(b) | the purpose for which it does so or one of the main purposes is any |
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other purpose which is a tax avoidance purpose (see subsection (4)). |
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(2) | The condition in subsection (1)(a) is taken to be met, in particular, if the |
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investing company was an associated company of a bank at the time when the |
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investing company acquired the share. |
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(3) | But subsection (2) does not apply if the investing company shows that— |
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(a) | immediately before that time, some or all of its business consisted of |
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making and holding investments, and |
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(b) | it acquired the share in the ordinary course of that business. |
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“bank” has the meaning given by section 840A of ICTA, and |
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“tax avoidance purpose”, in relation to a company, means any purpose |
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which consists of securing a tax advantage (whether for the company |
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(5) | Section 530(6) (when companies are associated) applies for the purposes of this |
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section as it applies for the purposes of section 530. |
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532 | The associated transactions condition |
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(1) | The associated transactions condition is that there is a scheme or arrangement |
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(whether or not the investing company is a party to it) under which the share |
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and one or more associated transactions are together designed to produce a |
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return for any one or more persons which equates, in substance, to the return |
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on an investment of money at a commercial rate of interest. |
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(2) | But the associated transactions condition is not met if— |
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(a) | the increasing value condition is met as respects the share or would be |
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apart from section 527(3) (exception for income-producing assets), or |
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(b) | the redemption return condition is met as respects the share or would |
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be apart from section 529(1)(c) (excepted shares). |
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(3) | In this section “associated transaction” includes— |
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(a) | entering into or acquiring rights or liabilities under any of the kinds of |
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contract specified in subsection (4), and |
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(b) | acquiring rights or receiving benefits in respect of other shares. |
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(4) | The contracts referred to in subsection (3) are— |
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(a) | a derivative contract, |
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(b) | a contract which would be a derivative contract, apart from section |
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(c) | a contract having a similar effect to a contract within paragraph (a) or |
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(d) | a contract of insurance or indemnity. |
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533 | Power to change conditions for non-qualifying shares |
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(1) | The Treasury may by regulations amend this Chapter so as to add, vary or |
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remove conditions to be met for the purposes of section 526(2) (non-qualifying |
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(2) | If the Treasury add, vary or remove such a condition, they may also by |
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regulations amend any of the enactments specified in subsection (3) so as to |
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make provision for or in connection with taxation in the case of any asset or |
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transaction which is or was mentioned in the condition. |
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(c) | Part 7 (derivative contracts), |
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(d) | Chapters 1 to 3 of Part 6 of ICTA (company distributions), and |
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(e) | Part 18 of ICTA (double taxation relief). |
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(4) | Regulations under this section may make— |
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(a) | different provision for different cases, and |
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(b) | incidental, supplemental, consequential and transitional provision and |
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(5) | Regulations made under subsection (4)(b) may, in particular, include provision |
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amending any enactment or any instrument made under an enactment. |
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Consequences of section 523 applying or ceasing to apply |
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534 | Amounts to be brought into account where section 523 applies |
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(1) | If section 523 (application of Part 5 to certain shares as rights under creditor |
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relationship) applies, the credits to be brought into account by the investing |
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company for the purposes of Part 5 as respects the share are to be determined |
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on the basis of fair value accounting. |
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(2) | Subsection (1) is subject to subsections (4) and (5). |
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(3) | Section 525(3) applies for the purposes of subsection (1) as it applies for the |
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purposes of section 525(1). |
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(4) | In the case of shares to which section 524 applies (shares subject to outstanding |
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third party obligations), in determining the credits to be brought into account |
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there must be left out of account any amounts in respect of any transaction (or |
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series of transactions) which— |
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(a) | would have the effect of preventing either of the conditions in section |
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525(1) (conditions for share to be an interest-like investment) from |
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(b) | would do so if the assumption in section 525(4) were ignored. |
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(5) | In the case of shares to which section 526 applies (non-qualifying shares) where |
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the increasing value condition is met (see section 527), in determining the |
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credits to be brought into account there must be left out of account any |
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amounts in respect of any transaction (or series of transactions) which— |
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(a) | would have the effect of preventing that condition from being met, or |
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(b) | would do so if the assumption in section 527(5) were ignored. |
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(6) | Subsection (7) applies if section 523 applies in the case of shares to which |
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section 526 applies where the associated transactions condition is met (see |
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(7) | The debits to be brought into account by the investing company for the |
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purposes of Part 5 as respects the share must not exceed the amount of the |
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credits brought into account in respect of the associated transactions under |
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Part 7 (derivative contracts), as a result of section 588, in accordance with |
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section 603 (non-qualifying shares where the associated transactions condition |
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(8) | Subsection (1) applies instead of section 349 (application of amortised cost |
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basis to connected companies relationships) if that section would otherwise |
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