Introduction Overview Section 34: Close investment-holding companies
142.This section defines the close investment-holding companies which are excluded from small profits rate by sections 18(b) and 19(1)(b). It is based on sections 13A and 839(8) of ICTA.
143.The rule about close investment-holding companies is an anti-avoidance rule. Without it, a wealthy individual could transfer investments to a company where undistributed income would bear tax at a rate lower than the individual’s marginal rate.
144.The section uses the expression “candidate company” to describe the company which is being considered to determine whether or not it is a close investment-holding company.
145.Subsection (1) defines close investment-holding companies by exclusion. All close companies are close investment-holding companies unless they exist for “permitted purposes”.
146.Subsection (2) sets out the permitted purposes. The first two purposes (paragraphs (a) and (b)) are concerned with the activities (broadly, trades and property businesses) of the candidate company itself. The last four purposes (paragraphs (c) to (f)) allow a candidate company to qualify as having a permitted purpose by reference to “qualifying companies” (and some others) with which it is closely connected.
147.Subsection (3) excludes from the property businesses in subsection (2)(b) letting to individuals who have a close connection with the candidate company.
148.Subsection (4) extends the purpose in subsection (2)(c) so that it covers not only investment in a qualifying company but also investment in another company which itself invests in a qualifying company.
149.Subsection (5) ensures that a company which exists for a permitted purpose does not become a close investment-holding company simply because it is wound up. But this special treatment lasts for only one accounting period.
150.Subsection (6) defines “qualifying company” by reference to the same purposes of trades and property businesses as apply to the candidate company in subsection (2)(a) and (b).
151.Subsection (7) provides two definitions for the section. In this section some permitted purposes depend on control of the candidate company. ESC C9 would operate against taxpayer companies in this context and so does not apply. It follows that the relaxations in sections 28 to 30 do not apply here and the meaning of “control” is different from that in section 25(4).