INTM215320 - Controlled Foreign Companies: before CTSA

Apportionment: indirect interests

ICTA88/S752 (5) and (6)

In some cases one person may hold an interest in a controlled foreign company directly and another person holds the same interest indirectly.

For example, take a United Kingdom resident company that owns 100 per cent of a non-resident company (not a controlled foreign company). That company in turn owns 100 per cent of a controlled foreign company. The immediate non-resident parent holds a 100 per cent interest in the controlled foreign company. The United Kingdom company also holds the same interest indirectly. In such cases the Board can use ICTA88/S752 (5) - see INTM215300. It treats the interest in the controlled foreign company as held solely by the company that holds it indirectly. In this way it apportions the whole of the chargeable profits etc. Were the Board to apportion the chargeable profits to the non-resident parent the Inspector could not make a Chapter IV assessment.

This is also the case where the United Kingdom resident company owns only a part interest in the non-resident holding company.

Sometimes a nominee or trustee holds the direct interest. The beneficial owner or beneficiary under the trust will hold the indirect interest. These are not to be treated as the 'same' interest under ICTA88/S752 (5).

There are however limitations on the Board's power under ICTA88/S752 (5) where more than one United Kingdom company holds the same interest in a controlled foreign company. The Board must treat the interest as held solely by the 'assessable company' in the following three cases.

If the interest is held directly by:

1. a company resident in the United Kingdom, that company is the assessable company
2. a person resident outside the United Kingdom and indirectly by only one company resident in the United Kingdom, the resident company is the assessable company
3. a person resident outside the United Kingdom and indirectly by two or more companies resident in the United Kingdom, the assessable company is the United Kingdom company which indirectly holds the interest in the controlled foreign company by virtue of holding a direct interest in a 'foreign holding company'. For this purpose a 'foreign holding company' is a company resident outside the United Kingdom which holds, directly or indirectly, the interest in the controlled foreign company.

Consider the effect of these rules in a vertical group structure. The effect is that the 'assessable company' is always the United Kingdom resident company that most immediately holds the group's interest in a controlled foreign company.