CG58644 - Co.purchases own shares: capital treatment: Condition A – additional requirements

CTA10/S1041 Section 1040: effect of entitlement to profits

CTA10/S1041 states that the seller’s interest would not be substantially reduced for CTA10/S1039 if the seller would be entitled to more than 75% of group’s total profits available for distribution. The share of the profits is expressed as a fraction.

Profits available for distribution are defined in CA06/S830 but with the same differences mentioned in CTA10/S1038(4) and (5) as explained at point 5 above.

CTA10/S1042 Other requirements

The seller must not, immediately after the purchase, be connected with the company making the purchase or any other company which is member of the same group as that company.

The purchase must not be part of a scheme or arrangement which is designed or likely to result in the seller or an associate having disqualifying interests. Interests in the company are disqualifying interests if the seller is connected and would not meet reduction tests in CTA10/S1037 or CTA10/S1039. Connected persons are defined in CTA10/S1062 for the purpose of this section and include, amongst others:

• Persons directly or indirectly entitled to acquire more than 30% of issued share capital, loan capital (unless in the trade of lending money) or voting power.
• Persons directly or indirectly entitled to acquire rights which would grant them more than 30% of the assets on winding up which would then be available as distribution to the equity holders of the company (CTA10/S158-S164).

This is especially important when considering multiple completion contracts, where the shares are purchased by the company in a staggered arrangement, but the beneficial ownership is transferred up front. The connection test is based on the legal ownership, not the beneficial ownership, so the individual may still be connected to the company even if the beneficial ownership is transferred.