This is the first in a series of articles in which we explore the tax rules applying to intra-group transactions. The basic proposition is that such transactions are tax neutral. This reflects the idea that a corporate group represents a single economic unit - when assets are transferred between members, ownership remains within the same family. Accordingly no tax is charged until such time that the asset leaves the group.
In this first article, we shall give an overview of what a corporate group looks like. Later articles will look at the actual rules governing intra-group transfers.
There are in fact, two sets of rules, one for capital assets and the other for intangibles such as IP and goodwill (from now on, we shall use the term IP to describe all such intangibles). However, both sets of rules have the same policy that:
Easy to recognise but hard to define! It is best explained by describing how a group can be constructed2:
This is best understood by a diagram.
They are all in the same group, with A, the principal company, at the top.
Adding the two up, we find that A has a 100% indirect interest in D. Note that it doesn't matter that D isn't a 75% subsidiary of the two companies directly above it. Because D qualifies in its own right as an (indirect) 75% subsidiary from A, it doesn't depend on B and C to be a member of the group.
In our second example, each company apart from A, is a 75% subsidiary of the one above it. But there is a surprising result in store.
Each company is a direct 75% subsidiary of the one above it - so the "75% condition" holds. But are they all 51% subsidiaries of A? In this case, D is the odd one out. A's interest in D is 75% x 75% x 75% or 42% - short of the 51% threshold. So the group consists of just A, B and C.
If A has a 75% subsidiary B, then A is beneficially entitled to at least 75% of B's ordinary share capital3.
Note that the number is 50, not 51 (don't ask me why - I didn't write the legislation). Note also that A's interest in B is measured by its economic stake, and not simply by the number of shares it owns. We shall come back to this issue at the end, when we discuss how corporate wrappers can be used for tax avoidance.
Two further points about groups:
The definition of a group is actually a lot more complicated (as if it wasn't complicated already). There are reams and reams of legislation, but we won't go there today. We have all we need to go on to the next stage.
But before we turn the page, a word on why group companies are required to have economic rights in their subsidiaries.
In this example, V is to sell a property worth £10m to P, but would prefer to avoid incurring a tax charge. So V and P get together and incorporate a new company Sub, such that:
Sub is not truly a sub at all. Although V holds the requisite share capital, it doesn't have the necessary economic rights. So if V sells the property to Sub, a tax charge is incurred in the normal way.
But what would be the position if we remove the condition that the principal company must hold the requisite economic rights?
In this case, Sub would be part of V's group and the property transfer would be tax free - even though the economic reality is that it has been sold to an outsider. P is not a group member, and yet it has an overwhelming stake in Sub that obliterates any interest V might have.
Substantially all of the rent on the property is paid to P by way of a dividend. P is also the beneficiary of any capital appreciation in the property. When the property is sold, Sub will be wound up, and all but a smidgen of the sale proceeds will then be distributed go to P.
This isn't the only way a corporate wrapper can(not) be used to avoid a tax liability. We shall come across this in later articles in this series.
Article contributed by: Satwaki Chanda.
The HMRC Manuals have a section on groups at CG45100.
Discussion on what constitutes a chargeable gains group is at CG45110
Discussion on IP groups is at CIRD40030.
(This article can be downloaded in pdf format at Academia.edu).
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
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