Corporation Tax Bill

House of Commons

Session 2009 - 10
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 5 — Group relief
Chapter 6 — Equity holders and profits or assets available for distribution
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160
Meaning of “ordinary shares”
(1)
For the purposes of section 158(1)(a) “ordinary shares” means shares other than
restricted preference shares.
(2)
For the purposes of subsection (1) restricted preference shares are shares that
meet each of conditions A to E.
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(3)
Condition A is that the shares are issued for consideration which is or includes
new consideration.
(4)
Condition B is that the shares do not carry any right to conversion into shares
or securities other than a right to conversion into—
(a)
shares to which section 164(1) applies,
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(b)
securities to which section 164(2) applies, or
(c)
shares or securities in the relevant company’s quoted parent company
(see section 164(3) to (7)).
(5)
Condition C is that the shares do not carry any right to the acquisition of shares
or securities.
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(6)
Condition D is that the shares—
(a)
do not carry a right to dividends, or
(b)
carry a restricted right to dividends (see section 161).
(7)
Condition E is that the shares, on repayment, do not carry rights to an amount
exceeding the new consideration mentioned in subsection (3) except so far as
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those rights are reasonably comparable with those generally carried by fixed
dividend shares listed on a recognised stock exchange.
161
Meaning of “restricted right to dividends”
(1)
For the purposes of condition D in section 160, a right to dividends carried by
shares in a company is a “restricted right to dividends” if—
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(a)
the dividends represent no more than a reasonable commercial return
on the new consideration received by the company in respect of the
shares, and
(b)
subsection (2), (3) or (4) applies.
(2)
This subsection applies if—
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(a)
the dividends are of a fixed amount or are at a fixed percentage rate of
the nominal value of the shares, and
(b)
the company is not entitled, by virtue of any term subject to which the
shares are issued or held, to reduce the amount of, or not to pay, any of
the dividends.
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(3)
This subsection applies if—
(a)
the dividends are of a fluctuating percentage rate of the nominal value
of the shares, and
(b)
the company is not entitled, by virtue of any term subject to which the
shares are issued or held, to reduce the amount of, or not to pay, any of
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the dividends.
(4)
This subsection applies if paragraph (a) of subsection (2) or (3) is met but
paragraph (b) of that subsection is not met and—

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Part 5 — Group relief
Chapter 6 — Equity holders and profits or assets available for distribution
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(a)
the company is only entitled to reduce the amount of, or not to pay, any
of the dividends in special circumstances, or
(b)
having regard to all the circumstances, it is reasonable to assume that
the company is only likely to reduce the amount of, or not to pay, any
of the dividends in special circumstances.
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(5)
For the purposes of subsection (3)(a) dividends are of a “fluctuating percentage
rate” of the nominal value of shares if the rate fluctuates in accordance with—
(a)
a standard published rate of interest,
(b)
the retail prices index, or
(c)
any other general index of prices similar to the retail prices index that
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is published by the government, or by an agent of the government, of
the country or territory in whose currency the shares are denominated.
(6)
For the purposes of subsection (4) a company reduces the amount of, or does
not pay, dividends “in special circumstances” if—
(a)
at the time the dividend is or would be payable, the company is in
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severe financial difficulties, or
(b)
the company does so for the purpose of following a recommendation of
a relevant regulatory body.
(7)
The Treasury may by order specify circumstances in which a company is to be
treated as in severe financial difficulties for the purposes of subsection (6)(a).
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(8)
In subsection (6)(b) “relevant regulatory body” means—
(a)
in relation to a dividend paid by a company that is authorised for the
purposes of the FISMA 2000, the Financial Services Authority, and
(b)
in relation to a dividend paid by any other company, a body
discharging functions in relation to the company under the law of a
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country or territory outside the United Kingdom that correspond to
functions discharged by the Financial Services Authority in relation to
a company authorised as mentioned in paragraph (a).
162
Meaning of “normal commercial loan”
(1)
For the purposes of sections 158(1)(b) and 159(4)(b) “normal commercial loan”
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means a loan—
(a)
which is of or includes new consideration, and
(b)
in relation to which each of conditions A to D is met.
(2)
Condition A is that the loan does not carry any right to conversion into shares
or securities other than a right to conversion into—
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(a)
shares to which section 164(1) applies,
(b)
securities to which section 164(2) applies, or
(c)
shares or securities in the relevant company’s quoted parent company
(see section 164(3) to (7)).
(3)
Condition B is that the loan does not carry any right to the acquisition of shares
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or securities.
(4)
Condition C is that the loan does not entitle the loan creditor to any amount by
way of interest which—
(a)
depends to any extent on the results of the relevant company’s business
or on the results of any part of that business,
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Corporation Tax Bill
Part 5 — Group relief
Chapter 6 — Equity holders and profits or assets available for distribution
89

(b)
depends to any extent on the value of any of the relevant company’s
assets, or
(c)
exceeds a reasonable commercial return on the new consideration lent.

This subsection needs to be read with section 163.
(5)
Condition D is that the loan is a loan in relation to which the loan creditor is
5
entitled, on repayment, to an amount which—
(a)
does not exceed the new consideration lent, or
(b)
is reasonably comparable with the amount generally repayable (in
relation to an equal amount of new consideration) under the terms of
issue of securities listed on a recognised stock exchange.
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163
Normal commercial loans: company’s results or value of assets
(1)
Interest is not within section 162(4)(a) by reason only that the terms of the loan
provide for the rate of interest—
(a)
to be reduced if the results of the relevant company’s business or any
part of the business improve, or
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(b)
to be increased if such results worsen.
(2)
Interest is not within section 162(4)(b) by reason only that the terms of the loan
provide for the rate of interest—
(a)
to be reduced if the value of any of the relevant company’s assets
increases, or
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(b)
to be increased if the value of any such assets decreases.
(3)
Subsection (4) applies if—
(a)
a loan is made to the relevant company for the purpose of facilitating
the acquisition of land,
(b)
the loan is made on the basis mentioned in subsection (5), and
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(c)
none of the land that the loan is used to acquire is acquired with a view
to resale at a profit.
(4)
Interest on the loan is not within section 162(4)(b) by reason only that the terms
of the loan are such that the only way the loan creditor can enforce payment of
an amount due is by exercising rights granted by way of security over the land
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that the loan is used to acquire.
(5)
The basis referred to in subsection (3)(b) is that—
(a)
the whole of the loan is to be applied in the acquisition of land by the
relevant company or in meeting incidental costs incurred wholly and
exclusively for the purpose of obtaining the loan or providing security
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for the loan,
(b)
the payment of any amount due in connection with the loan to the
person making it is to be secured on the land that the loan is used to
acquire, and
(c)
no other security is to be required for the payment of any such amount.
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(6)
“Incidental costs” means expenditure on fees, commissions, advertising,
printing or other incidental matters.
164
Sections 160 and 162: supplementary
(1)
This subsection applies to any shares—

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Part 5 — Group relief
Chapter 6 — Equity holders and profits or assets available for distribution
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(a)
in relation to which conditions A, C, D and E in section 160 are met, and
(b)
which do not carry any rights to conversion into shares or securities
other than rights to conversion into shares or securities in the relevant
company’s quoted parent company (see subsections (3) to (6)).
(2)
This subsection applies to any securities—
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(a)
which represent a loan of or including new consideration,
(b)
in relation to which conditions B, C and D in section 162 are met, and
(c)
which do not carry any rights to conversion into shares or securities
other than rights to conversion into shares or securities in the relevant
company’s quoted parent company.
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(3)
For the purposes of this section and sections 160 and 162 a company (“the
candidate company”) is the relevant company’s quoted parent company if
(and only if)—
(a)
the relevant company is a 75% subsidiary of the candidate company,
(b)
the candidate company is not a 75% subsidiary of any company, and
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(c)
the candidate company’s ordinary shares are listed on a recognised
stock exchange.
(4)
If the candidate company’s ordinary share capital is divided into two or more
classes, subsection (3)(c) is met only if its ordinary shares of each class are listed
on a recognised stock exchange.
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(5)
In subsections (3) and (4) “ordinary shares” means shares forming part of
ordinary share capital.
(6)
Subsection (7) applies if, in determining under subsection (3)(a) whether the
relevant company is a 75% subsidiary of the candidate company, it is necessary
to know, for the purposes of subsection (1)(b) or (2)(c) or section 160(4)(c) or
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162(2)(c), whether the candidate company is the relevant company’s quoted
parent company.
(7)
It is to be assumed for those purposes that the candidate company is the
relevant company’s quoted parent company.
Company’s entitlement to profits or assets available for distribution: basic provisions
30
165
Proportion of profits available for distribution to which company is entitled
(1)
This section applies for the purpose of determining the proportion to which a
company (“company A”) is, at any time, beneficially entitled of any profits
available for distribution to the equity holders of another company (“company
B”).
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(2)
The proportion is the proportion to which company A would, at that time, be
beneficially entitled on a distribution in money to the equity holders of
company B (“the profit distribution”) of—
(a)
an amount of profits equal to company B’s total profits of the relevant
accounting period (see section 168), or
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(b)
if there are no such total profits, profits of £100.
(3)
It does not matter for the purposes of subsection (2) if any of company B’s total
profits are not actually distributed.

Corporation Tax Bill
Part 5 — Group relief
Chapter 6 — Equity holders and profits or assets available for distribution
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(4)
If company B is non-UK resident, company B’s total profits are to be calculated
as if it were UK resident.
(5)
For the purposes of the profit distribution, it is to be assumed that no payment
is made by way of repayment of share capital or of the principal secured by any
loan unless that payment is a distribution.
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(6)
Subject to subsection (5), if an equity holder is entitled as such to a payment
which (apart from this subsection) would not be a distribution, the equity
holder is nevertheless to be treated as entitled to the payment on the profit
distribution.
166
Proportion of assets available for distribution to which company is entitled
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(1)
This section applies for the purpose of determining the proportion to which a
company (“company A”) would, at any time, be beneficially entitled of any
assets available for distribution to the equity holders of another company
(“company B”) on a winding up.
(2)
The proportion is the proportion to which company A would, at that time, be
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beneficially entitled if company B were to be wound up and on that winding
up (“the notional winding up”) the value of assets available for distribution to
company B’s equity holders were equal to—
(a)
the assets amount minus the liabilities amount, or
(b)
if the assets amount does not exceed the liabilities amount or if
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company B’s balance sheet is prepared to a date other than the end of
the relevant accounting period (see section 168), £100.
(3)
The “assets amount” is the amount of company B’s assets as shown in its
balance sheet as at the end of the relevant accounting period.
(4)
The “liabilities amount” is the amount of company B’s liabilities as shown in
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that balance sheet but excluding liabilities to equity holders as such.
(5)
If, on the notional winding up, an equity holder would be entitled as such to
an amount of assets which (apart from this subsection) would not be a
distribution of assets, the equity holder is nevertheless treated as entitled to the
amount on the distribution of assets on the notional winding up.
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(6)
Subsection (7) applies if—
(a)
an equity holder (“E”) of company B provided new consideration for
any shares or securities in company B in relation to which E is an equity
holder,
(b)
company B makes a loan to E or any person connected with E or
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acquires shares or securities in E or any person so connected, and
(c)
in making that loan or acquiring those shares or securities, company B
applies, directly or indirectly, an amount (“the returned amount”)
corresponding to the whole or any part of the new consideration.
(7)
The following amounts are to be reduced by the returned amount—
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(a)
the assets amount, and
(b)
the amount of assets to which E is beneficially entitled on the notional
winding up.