INTM205140 - Controlled Foreign Companies: exemptions - Exempt Activities Test ('EAT')
Definition of a holding company
ICTA88/SCH25/PARA 6(6) and PARA12(1)-(3)
A controlled foreign company will be treated as a holding company for the purposes of the exempt activities test if it is
- a company the business of which consists wholly or mainly in
the holding of shares or securities of either of the following
types of companies
i) 'local holding companies' (or a ‘local holding company’) which are its 90% subsidiaries (see INTM205220 to INTM205250), or
ii) trading companies (or a trading company) which are 51% subsidiaries or, if not, are either 'maximum permitted shareholding companies' or '40/40' controlled foreign companies (see below); or
- a company which would fall within (a) above if there were
disregarded so much of its business as consists in the holding of
the property or rights or any description, for use wholly or mainly
by companies which it controls and which are resident in the
territory in which it is resident.
‘Securities’ is not defined, and must be interpreted
in accordance with its ordinary meaning of a debt or claim that is
secured (i.e. the subject of a legally enforceable document).
‘Holding’ does not include dealing in securities, i.e.
the regular acquisition and disposal of securities.
The meanings of the terms '90% subsidiary' and '51%
subsidiary' are those found in ICTA88/S838 with the exception that
a company will be a 51% subsidiary only if more than half of its
ordinary share capital is directly owned by the holding company
rather than owned directly or indirectly by the holding company.
The term 'maximum permitted shareholding company' above is
non-statutory. It means a trading company in which the holding
company holds the maximum amount of ordinary share capital which is
permitted in the territory:
- in which the trading company is resident; and
- from whose laws the trading company has derived its status as a company.
If, for example, a holding company owns 35% of the ordinary
share capital of a trading company incorporated and resident in a
territory and that is the maximum amount which can be held under
the laws of that territory by a company under foreign control, the
trading company will be treated in the same position as a 51%
subsidiary for the purposes of the exempt activities test.
The term '40/40' controlled foreign company is similarly
non-statutory. It means a company that is treated as a controlled
foreign company solely because of the 40% test in ICTA88/S747 (1A)
where the United Kingdom resident holding an interest of 40% or
more in the controlled foreign company also controls the holding
company in question. See definition in
INTM202020.
A company may engage in activities other than the holding of
shares or securities in the types of company specified above,
provided that its business consists wholly or mainly in the holding
of such shares or securities (or would so consist if the part of
its business relating to the holding of property etc for use by its
subsidiaries resident in its own territory of residence were
disregarded). So, for example, the existence of some trading
activity, shareholdings not of the type specified, (for example, in
associated companies or dormant subsidiaries) or portfolio
investments will not prevent the company from qualifying as a
holding company, provided that its business consists wholly or
mainly in the holding of shares or securities in the types of
company specified at a) and b) above. ‘Wholly or
mainly’ means more than 50% of the business.
It is recognised that there may be occasions where
information about the Controlled Foreign Company may not be
available or the time it would take to verify beyond any doubt that
the Controlled Foreign Company satisfies all of the conditions for
the exemption would be disproportionate. In these circumstances see
INTM214020 for further guidance.
The definition of a holding company is modified in relation
to 'local holding companies', see
INTM205220 to
INTM205250.
