CTM03810 - Corporation Tax: small companies: control by means of preference shares

Certain financial institutions (generally known as 'venture capital companies') may provide financial assistance to companies by taking up preference shares rather than by making loans. In some cases the degree of share ownership is sufficient to give the venture capital company control under ICTA88/S416 (2)(a) (for the meaning of 'control' see CTM60220).

ESCC9 may then apply, in determining whether:

• the venture capital company and the 'investee' company are associated, or
• companies under the common control of the venture capital company as associated with each other.

You should disregard shares which are 'fixed rate preference shares' as defined in ICTA88/SCH28B/PARA13 (6), if the company possessing those 'fixed rate preference shares' meets all the following conditions:

• it is not a close company, and
• it takes no part in the management or conduct of the company which issues the shares, or of the business of that company, and
• it subscribed for the shares in the ordinary course of a business carried on by it, which includes the provision of finance.

'Fixed-rate preference shares' means shares which:

a) were issued wholly for new consideration, and

b) do not carry any right either to conversion into shares or securities of any other description or to the acquisition of any additional shares or securities, and

c) do not carry any right to dividends other than dividends which:

i) are of a fixed amount or at a fixed rate per cent of the nominal value of the shares, and
ii) together with any sum paid on redemption, represent no more than a reasonable commercial return on the consideration for which the shares were issued.