CG73730 - Non-Resident Capital Gains Tax (NRCGT) - Disposals on or after 6 April 2015 to 5 April 2019: The Charge to Non-Resident CGT, and the exemptions: Divided or 'Protected Cell' Companies

TCGA92/S14G* sets out provisions for determining whether a special type of company may claim exemption under TCGA92/S14F*. Described in the legislation as “divided companies” (but often referred to as protected cell companies), this type of company is divided into distinct sub-entities, each capable of having share capital that has rights only in respect of assets and profits of that particular cell. Some or all of its assets are available to meet particular liabilities and some or all of the members have rights to particular assets.

Shareholders in different cells therefore have little or no common interest. Each cell appears like a separate company, but all are contained within a single legal entity. The entity as a whole will generally not be close, but each cell would be a close company if it were a separate entity.

This type of company is available under the law of some jurisdictions, including the UK, but there is no precise list of which countries do and do not allow them.

If the legislation did not deal with them specifically, there could be scope for such entities to be used to avoid non-resident CGT. TCGA92/S14G* therefore contains a provision ensuring that the test of whether a company is diversely-held is applied to each individual cell or division of the company, rather than just at the level of the whole company. In effect it treats each cell in a protected cell company as if it were a separate company for the purposes of the control test.

The legislation specifies that a company is a “divided company” if, under the law under which the company is formed, provision is made in the articles of association or other document regulating the company, or under arrangements entered into by or in relation to the company -

• some or all of the assets of the company are available primarily, or only, to meet particular liabilities of the company, and
• some or all of the members of the company, and some or all of its creditors, have rights primarily, or only, in relation to particular assets of the company.

Where a divided company makes a non-resident CGT disposal, it may be treated as a closely-held company and so not an eligible company for the purposes of TCGA92/S14F* in relation to the disposal, where the following conditions apply -

• the gain or loss accruing on the disposal is primarily or wholly attributable to a particular division of the company, and
• if that division were a separate company, it would be a closely-held company.

For this purpose a “division” is an identifiable part of the company which carries on distinct business activities and to which particular assets and liabilities of the company are primarily or wholly attributable.

*These sections were re-written for disposals from 6 April 2019 see CG10150