Introduction Details of the Schedule Part 1 – Insertion of new Part 9A of CTA 2009 Exempt classes
16.There are five exempt classes set out in sections 931E to 931I. Distributions will frequently fall into more than one of these classes, but it is sufficient to fall into any one of them for a distribution to be exempt, provided the anti-avoidance rules in sections 931J to 931Q do not apply.
17.Section 931E provides exemption for distributions paid to a parent company that controls the company making the distribution. Control for this purpose is defined by reference to the controlled foreign company (CFC) control rules, including the extension to joint ventures that have a 40 per cent interest combined with another 40 per cent to 55 per cent interest. The definition of control for CFC purposes was extended in Finance Act 2008 by reference to entitlement to the majority of income or capital rights. There is an anti-avoidance rule specific to this section in section 931J.
18.Section 931F provides exemption for all distributions paid in respect of non-redeemable ordinary shares. The terms “ordinary share” and “redeemable” are defined in section 931U. A share is an ordinary share provided it carries no preferential rights to income or capital. There is an anti-avoidance rule specific to this section in section 931K
19.Section 931G provides exemption for distributions in respect of portfolio holdings. Portfolio holdings are holdings of less than 10 per cent of shares of the same class as those in respect of which the relevant distribution is made. The 10 per cent limit must be met by reference to share capital, income rights and capital rights. Shares are not of the same class if different proportions of their nominal share capital are paid up (for this purpose any amount paid in respect of share premium is disregarded). There is an anti-avoidance rule specific to this section in section 931L.
20.Section 931H provides exemption for any dividends paid out of profits that are not derived from transactions that achieve (and that have as a main purpose to achieve) a UK tax advantage of more than a negligible amount. Profits not derived from such transactions are referred to as “relevant profits”.
21.If a company has any profits that are not relevant profits, which are therefore derived from avoidance transactions, this exempt class will not be available and will remain unavailable until all those profits have been paid out as taxable dividends. However, once those “avoidance” profits have been fully paid out in taxable form, this exempt class will become available for any subsequent dividends paid from relevant profits, including the remaining part of a dividend that is paid partly but not wholly out of profits other than relevant profits.
22.There is a transitional rule in Part 3 of this Schedule that treats all profits earned from transactions that took place more than 12 months before the commencement date for the Schedule (that is, before 1 July 2008) as relevant profits. Any dividend paid out of such profits will therefore qualify for this exempt class.
23.If a dividend is paid partly out of relevant profits and partly out of other profits, it is treated as two separate dividends for the purposes of this Part and also for the purposes of Part 18 of ICTA, which allows double taxation relief to be given in respect of a non-exempt part of a dividend.
24.Paragraph 8 of the Schedule amends section 799 ICTA to ensure that section 931H and the double taxation relief rules in Part 18 ICTA are consistent with one another in the way that profits are specified in relation to a taxable dividend.
25.Section 931I provides exemption for distributions paid in respect of shares that would be taxed as loan relationships except that they are not held for an unallowable purpose and are consequently exempt from taxation under loan relationship rules. The loan relationship exemption would not in itself give exemption from taxation under Part 9A, which is instead provided by this section.
26.Section 931I refers to section 521C of CTA, which is itself being introduced by Schedule 24 of this Act (section 48). The term “unallowable purpose” will be defined by section 521E.