INTM233300 - Controlled Foreign Companies: Apportionment of a CFC’s Chargeable Profits and Creditable Tax: Apportionment on a just and reasonable basis
Where the relevant interests in a CFC are not held solely by virtue of ordinary shares then the formulaic approach will not apply and instead TIOPA10/S371QC(2) applies to require an apportionment of the chargeable profits and creditable tax for the relevant accounting period on a just and reasonable basis among the persons who have relevant interests in the CFC at any time in that period.
For a basis to be just and reasonable, it should reflect the power the relevant person has to secure that the income of the CFC is applied for their benefit. In doing so the following general principles should be followed:
- The total amount apportioned should not exceed the amount of the CFC’s chargeable profits or creditable tax of the accounting period concerned;
- Where shares of the same class are held by different persons during the accounting period the amounts apportioned to those persons in respect of those shares should be in direct proportion to the size of the holding and the number of days during the accounting period for which they are held;
- The same principle as above should be applied where more than one person holds an interest of the same description in a CFC.
Where preference shares carry entitlement only to a dividend, then the apportioned profits will be the equivalent of the dividend only. Other rights (e.g. to convert) may attract a greater proportion of the profits.
Example 1
A CFC has two classes of shares, A and B shares. A shares are £1 ordinary voting shares and B shares are £1 non-voting 9% preference shares with no rights in a winding-up. The whole of the 500 issued 9% preference shares are held by French resident individuals who are wholly unconnected with United Kingdom interests. The United Kingdom interests hold the whole of the 100 issued A shares. If the distributable profits of the CFC for the accounting period are 500 and the chargeable profits 700 the following would be an acceptable just and reasonable apportionment:
- French shareholders 500 x 9% = 45 (6.5%)
- United Kingdom shareholders 700 - 45 = 655. (93.5%)
Example 2
A CFC has two classes of shares, A and B shares. The A shares are ordinary voting shares. The B shares are non-voting 5% preference shares with the right to conversion into ordinary shares after 5 years. It would be proper here to apportion to the B shareholders, in addition to 5% of the profits, a further amount to reflect the conversion element of the value of those shares discounted by an appropriate sum. What is a just and reasonable apportionment will depend very much on the facts.
The Base Protection Policy Team in CSTD, Business Assets & International will be happy to give guidance or, if appropriate, a non statutory clearance in any case where a UK resident person is uncertain about what would be accepted as a just and reasonable apportionment.
Where an apportionment falls to be made under TIOPA/S371QC(2) (interests held other than by virtue of ordinary shares alone) and a return is made or amended using a particular basis adopted by the UK resident person, an officer of Revenue and Customs may determine another basis to be used for the apportionment in accordance with TIOPA10/S371UC. In other words, HMRC may determine that a different ‘just and reasonable’ basis be used to apportion profits than the basis used by the UK resident person in its self-assessment. This ensures -
- First, that where there is more than one interest holder in a CFC all interest holders use the same just and reasonable basis (otherwise chargeable profits might fall out of account or be double taxed);
- Secondly, that different just and reasonable bases are not used from year to year for avoidance reasons.
Once a determination under TIOPA10/S371UC has been made by an officer, the determined basis of apportionment shall be treated as the only basis of apportionment allowed. A determination may be the subject of an appeal against an amendment of the return but only on the grounds that the basis of apportionment determined by the officer of Revenue and Customs is not just and reasonable. Paragraphs 30 to 34 of Schedule 18 to FA1998 apply to any such determination.