EGL51000 - Introduction to joint ventures and group companies with minority investors: what is a joint venture and which members are affected?

What is a qualifying joint venture (JV)?

The definition of a JV company for EGL purposes at F(2)A23/S292(1)-(2) is similar to that used for the Substantial Shareholding Exemption that applies for corporation tax on chargeable gains.

A company is a JV company if –

• It is not a 75% subsidiary of another company, because in that case it would be a member of a wider group.

• At least 75% of the company’s share capital is held by five or fewer persons. For this purpose, members of the same group are treated as being the same person.

• Where the company does not have share capital then the last condition is based instead on entitlement to distributable profits.

Which members of a JV are affected?

F(2)A23/S292(3)-(4) labels a member of a JV that is affected by the EGL rules as a “participant”. A participant is a company or group that holds 10% or more of the ordinary share capital of the JV. HMRC considers that for this purpose a holding of shares is determined by their beneficial ownership of shares rather than the holding of legal title. This test is based on entitlement to distributable profits for a JV that does not have ordinary share capital. This rule does not apply by reference to any particular period, rather a company or group will be regarded as a participant at any point in time at which the condition is met. Where an investor is part of a group, all the interests across the members of the group are aggregated in applying this test.

Where the participant is not itself a generating undertaking then it is treated as one for EGL purposes. For example, an investment company is a participant in a JV that generates electricity. Generation receipts are attributed to it under the rule described at EGL53000. The investment company is liable to EGL on those receipts because it is treated as a generating undertaking even though it does not itself generate electricity. Extending the example, say there are two investment companies in the same group that are members of a JV and taken together they hold more than 10% of its ordinary share capital. It is then the investment company group that is treated as a generating undertaking for EGL purposes.