If the principal company is prevented by law from distributing
90% of the group's tax-exempt income, then the condition is
regarded as having being met if the principal company distributes
as much as it legally can. This is set out in section 107(9) as
modified by paragraph 6(4) Schedule 17 FA 2006. See
GREIT02055 for examples of what would
be regarded as a legal impediment for section 107(9) purposes.
For example, the tax-exempt income of a Group REIT is 100, of
which the principal company P is prevented by law from distributing
25. The normal distribution requirement would be for P to
distribute 90% of 100 = 90, so the condition is satisfied if P
distributes 75. If however, the unlawful distribution is 5, P would
be required to distribute 90 to meet the Distribution
condition.
The legal restriction can be one affecting a subsidiary rather
than the principal – as set out in section 107(9) as modified
by paragraph 6(5) Schedule 17 FA 2006. If it is unlawful for a
subsidiary to pay up some or all of its profits as a dividend, then
the distribution requirement is satisfied if the principal company
distributes as much as legally it can.
For example, the principal company P has tax-exempt income of
50 and subsidiary S has tax- exempt income of 100, of which S is
prevented by law from distributing 25. The normal distribution
requirement would be for P to distribute 90% of 150 = 135, so the
condition is satisfied if P distributes 75 + 45 = 120. If however,
the unlawful distribution is 5, P would be required to distribute
135 to meet the Distribution condition.
This is a consequence of how the 90% distribution condition
works for Group REITs. It applies to the aggregate of the
tax-exempt profits of all the group members. The condition is
not that 90% of the tax-exempt profits of each
group are distributed.
The principal company cannot get round the distribution
requirement by leaving tax-exempt profits in non-resident
subsidiaries and claiming that it has insufficient distributable
reserves of its own to pay out to the level required. It is up to
the principal company to ensure it has sufficient funds to meet the
requirement.
For legal impediment get-out, law means UK law (including Northern Ireland legislation and Acts of the Scottish Parliament) (section 107(9)(a)(i) FA 2006). There are however powers to allow laws of other countries to be added by regulation. No regulations have been made under this power.
