Corporation Tax Bill

House of Commons

Session 2009 - 10
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 23 — Company distributions
Chapter 3 — Matters which are not distributions
507

Distribution as part of a cross-border merger
1031
Distribution as part of a cross-border merger
If—
(a)
a company making a distribution as part of a merger ceases to exist
(without being wound up), and
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(b)
section 140E or 140F of TCGA 1992 (cross-border mergers) applies in
relation to the merger,
the distribution is not a distribution of a company for the purposes of the
Corporation Tax Acts.
Payments of interest
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1032
Interest etc paid in respect of certain securities
(1)
Any interest or other distribution which—
(a)
is paid out of the assets of a company (“the borrower”) to another
company which is within the charge to corporation tax,
(b)
is paid in respect of securities of the borrower which are special
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securities (as defined in section 1015), and
(c)
does not fall within paragraph E in section 1000(1) (distributions in
respect of non-commercial securities),

is not a distribution for the purposes of the Corporation Tax Acts.
(2)
But subsection (1) does not apply if the company to which the interest or other
20
distribution is paid is entitled under any enactment to an exemption from tax
in respect of that interest or distribution.
Purchase of own shares
1033
Purchase by unquoted trading company of own shares
(1)
A payment made by a company on the redemption, repayment or purchase of
25
its own shares is not a distribution for the purposes of the Corporation Tax Acts
if—
(a)
the company is an unquoted trading company, or the unquoted
holding company of a trading group, and
(b)
either Condition A or Condition B is met.
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(2)
Condition A is that—
(a)
the redemption, repayment or purchase is made wholly or mainly for
the purpose of benefiting a trade carried on by the company or any of
its 75% subsidiaries,
(b)
the redemption, repayment or purchase does not form part of a scheme
35
or arrangement the main purpose or one of the main purposes of which
is—
(i)
to enable the owner of the shares to participate in the profits of
the company without receiving a dividend, or
(ii)
the avoidance of tax, and
40
(c)
the requirements set out in sections 1034 to 1043 (so far as applicable)
are met.

Corporation Tax Bill
Part 23 — Company distributions
Chapter 3 — Matters which are not distributions
508

(3)
Condition B is that the whole or substantially the whole of the payment (apart
from any sum applied in paying capital gains tax charged on the redemption,
repayment or purchase)—
(a)
is applied by the person to whom it is made in discharging a liability of
that person for inheritance tax charged on a death, and
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(b)
is applied in that way within two years after the death.
(4)
But if condition B is met, subsection (1) does not apply so far as the liability in
question could without undue hardship have been discharged otherwise than
through the redemption, repayment or purchase of—
(a)
shares in the company, or
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(b)
shares in another unquoted company which is a trading company or
the holding company of a trading group.
(5)
In sections 1034 to 1043—
“the purchase” means the redemption, repayment or purchase referred to
in subsection (1), and
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“the seller” means the owner of the shares at the time the redemption,
repayment or purchase is made.
(6)
In this section and sections 1034 to 1047 references to a payment made by a
company include anything else that—
(a)
is a distribution, or
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(b)
would be a distribution but for this section.
1034
Requirements as to residence
(1)
The seller must be resident and ordinarily resident in the United Kingdom in
the tax year in which the purchase is made.
(2)
If the shares are held through a nominee, the nominee must also be resident
25
and ordinarily resident in the United Kingdom in the tax year in which the
purchase is made.
(3)
The residence and ordinary residence of personal representatives are taken for
the purposes of this section to be the same as the deceased person’s residence
and ordinary residence immediately before that person’s death.
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(4)
The references in this section to a person’s ordinary residence are to be ignored
in the case of a company.
1035
Requirement as to period of ownership
(1)
The shares must have been owned by the seller throughout the 5 years ending
with the date of the purchase.
35
(2)
In determining whether the requirement in subsection (1) is met in a case
where the seller acquired shares of the same class at different times—
(a)
shares acquired earlier are taken into account before shares acquired
later, and
(b)
any previous disposal by the seller of shares of that class is assumed to
40
be a disposal of shares acquired later rather than of shares acquired
earlier.
(3)
If the time when any shares were acquired would be determined for the
purposes of capital gains tax under any provision of Chapter 2 of Part 4 of

Corporation Tax Bill
Part 23 — Company distributions
Chapter 3 — Matters which are not distributions
509

TCGA 1992 (reorganisation of share capital, conversion of securities etc) then,
unless the shares—
(a)
were allotted for payment, or
(b)
were comprised in share capital to which section 1049 (stock dividends)
applies,
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the time when the shares were acquired is determined in the same way for the
purposes of this section.
1036
Determining the period of ownership
(1)
If at any time during the period mentioned in section 1035(1) the shares were
transferred to the seller by a person (“the transferor”) who—
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(a)
was then the seller’s spouse or civil partner, and
(b)
was then living with the seller (see section 1116),

any period during which the shares were owned by the transferor is treated for
the purposes of section 1035(1) as a period of ownership by the seller.
(2)
But subsection (1) does not apply if at the date of the purchase the transferor is
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alive but is no longer the seller’s spouse or civil partner living with the seller.
(3)
If the seller became entitled to the shares under the will or on the intestacy of a
previous owner, or is the personal representative of a previous owner—
(a)
any period during which the shares were owned by the previous
owner, or the personal representatives of the previous owner, is treated
20
for the purposes of section 1035(1) as a period of ownership by the
seller, and
(b)
section 1035(1) has effect as if it referred to three years instead of five.
1037
Requirement as to reduction of seller’s interest as shareholder
(1)
If, immediately after the purchase, the seller owns shares in the company, the
25
seller’s interest as a shareholder must be substantially reduced.

This is subject to section 1043.
(2)
If, immediately after the purchase, any associate of the seller owns shares in the
company, the combined interests as shareholders of the seller and the seller’s
associates must be substantially reduced.
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This is subject to section 1043.
(3)
The seller’s interest as a shareholder is substantially reduced if (and only if) the
seller’s subsequent interest is not more than 75% of the seller’s prior interest.

This is subject to section 1038.
(4)
“The seller’s prior interest” means the total nominal value of the shares owned
35
by the seller immediately before the purchase, expressed as a fraction of the
issued share capital of the company at that time.
(5)
“The seller’s subsequent interest” means the total nominal value of the shares
owned by the seller immediately after the purchase, expressed as a fraction of
the issued share capital of the company at that time.
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(6)
The question whether the combined interests as shareholders of the seller and
the seller’s associates are substantially reduced is determined in the same way
as the question whether a seller’s interest as shareholder is substantially

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Part 23 — Company distributions
Chapter 3 — Matters which are not distributions
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reduced, except that the seller is assumed to have the interests of the seller’s
associates as well as the seller’s own.
1038
Section 1037: effect of entitlement to profits
(1)
The seller’s interest as a shareholder is not taken to be substantially reduced for
the purposes of section 1037(1) if—
5
(a)
the seller would, if the company distributed all its profits available for
distribution immediately after the purchase, be entitled to a share of
those profits, and
(b)
that share expressed as a fraction of the total of those profits is more
than 75% of the corresponding fraction immediately before the
10
purchase.
(2)
In determining for the purposes of subsection (1) the division of profits among
the persons entitled to them, a person entitled to periodic distributions
calculated by reference to fixed rates or amounts is regarded as entitled to a
distribution of the amount, or maximum amount, to which the person would
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be entitled for a year.
(3)
In subsection (1) “profits available for distribution” has the meaning given by
section 830(2) of the Companies Act 2006, but with the differences mentioned
in subsections (4) and (5).
(4)
For the purposes of subsection (1) the amount of the profits available for
20
distribution (whether immediately before or immediately after the purchase)
is treated as increased—
(a)
in the case of every company, by £100, and
(b)
in the case of a company from which any person is entitled to periodic
distributions calculated by reference to fixed rates or amounts, by a
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further amount equal to that required to make the distribution to which
the person is entitled in accordance with subsection (2).
(5)
If the total of the sums payable by the company—
(a)
on the purchase, and
(b)
on any redemption, repayment or purchase of other shares of the
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company taking place at the same time,

exceeds the amount of the profits available for distribution immediately before
the purchase, that amount is treated as further increased by an amount equal
to the excess.
(6)
References in this section to entitlement are, except in the case of trustees and
35
personal representatives, references to beneficial entitlement.
1039
Requirements where purchasing company is a member of a group
(1)
This section applies if the company making the purchase is immediately before
the purchase a member of a group.
(2)
In this section and sections 1040 to 1041 that group is referred to as “the
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purchaser’s group”.
(3)
If—
(a)
immediately after the purchase the seller owns shares in one or more
other members of the purchaser’s group (whether or not the seller then
owns shares in the company making the purchase), or
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Corporation Tax Bill
Part 23 — Company distributions
Chapter 3 — Matters which are not distributions
511

(b)
immediately after the purchase the seller owns shares in the company
making the purchase, and immediately before the purchase the seller
owns shares in one or more other members of the group,

the seller’s interest as a shareholder in the group must be substantially reduced
(see section 1040(1)).
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(4)
If immediately before the purchase an associate of the seller owns shares in any
member of the purchaser’s group, the combined interests as shareholders in
the group of the seller and the seller’s associates must be substantially reduced
(see section 1040(4)).
(5)
This section is subject to section 1043 (relaxation of requirements in certain
10
cases).
1040
Determining whether interests as shareholders in a group are substantially
reduced
(1)
The seller’s interest as a shareholder in the purchaser’s group is taken to be
substantially reduced if (and only if) it is not more than 75% of the
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corresponding interest immediately before the purchase.

This is subject to section 1041(1).
(2)
The seller’s interest as a shareholder in the group is calculated by—
(a)
expressing the total nominal value of the shares owned by the seller in
each relevant company as a fraction of the issued share capital of the
20
company,
(b)
adding together the fractions obtained under paragraph (a), and
(c)
dividing the result by the number of relevant companies (including any
in which the seller owns no shares).
(3)
In this section and section 1041 “relevant company” means—
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(a)
the company making the purchase, and
(b)
any other member of the purchaser’s group in which the seller owns
shares immediately before or immediately after the purchase.

This is subject to subsection (4).
(4)
The question whether the combined interests as shareholders in the
30
purchaser’s group of the seller and the seller’s associates are substantially
reduced is determined in the same way as the question whether a seller’s
interest as a shareholder in a group is substantially reduced, except that—
(a)
the seller is assumed to have the interests of the seller’s associates as
well as the seller’s own, and
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(b)
references in subsection (2) and section 1041(2) to a relevant company
are read accordingly.
1041
Section 1040: effect of entitlement to profits
(1)
The seller’s interest as a shareholder in the purchaser’s group is not taken to be
substantially reduced if—
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(a)
the seller would, if every member of the group distributed all its profits
available for distribution immediately after the purchase (including
any profits received by it on a distribution by another member), be
entitled to a share of the profits of one or more of them, and
(b)
the new entitlement exceeds 75% of the old entitlement.
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Corporation Tax Bill
Part 23 — Company distributions
Chapter 3 — Matters which are not distributions
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(2)
In subsection (1)—
“the new entitlement” means the share, or the aggregate of the shares,
mentioned in subsection (1)(a), expressed as a fraction of the aggregate
of the profits available for distribution of every member of the group
which is—
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(a)
a relevant company, or
(b)
a 51% subsidiary of a relevant company, and
“the old entitlement” means the corresponding fraction immediately
before the purchase.
(3)
Subsections (2) to (5) of section 1038 apply for the purposes of this section as
10
they apply for the purposes of section 1038(1).
1042
Other requirements
(1)
The seller must not, immediately after the purchase, be connected with—
(a)
the company making the purchase, or
(b)
any other company which is a member of the same group as that
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company.
(2)
The purchase must not be part of a scheme or arrangement which is designed,
or likely, to result in—
(a)
the seller, or
(b)
an associate of the seller,
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having disqualifying interests in the company.
(3)
For the purposes of subsection (2), interests in the company are disqualifying
interests if any of the requirements in subsection (1) and sections 1037 and 1039
could not be met if the person in question had those interests immediately after
the purchase.
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(4)
A transaction occurring within one year after the purchase is treated for the
purposes of subsection (2) as part of a scheme or arrangement of which the
purchase is also part.
(5)
Subsections (1) and (2) are subject to section 1043.
1043
Relaxation of requirements in certain cases
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(1)
Subsection (2) applies if—
(a)
any requirement under any of sections 1037 to 1042 which is applicable
is not met in relation to the seller, but
(b)
the seller proposed or agreed to the purchase in order that the
requirement in section 1037(2) or 1039(4) could be met in respect of the
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redemption, repayment or purchase of shares owned by a person of
whom the seller is an associate.
(2)
So far as that result is achieved through the purchase, section 1033(2) has effect
as if the requirements in sections 1037 to 1042 were met in relation to the seller.