CTM81122 - Groups & consortia: groups - entitlement to profits or assets available for distribution: example 2 - limited rights

CTA10/PART 5/Ch6

Background to example 2

The background to the example is that Company X is the true economic parent of Company Z. Company Z is undertaking a five year investment programme expected to give rise to trade losses. So this creates the possibility that Company Z will be able to surrender group relief to Company X.

However Company X has no taxable profits, and is unlikely to have future taxable profits. If it were not for CTA10/PART 5/Ch6, a company with ample profits could group itself artificially with Company Z and purchase the relief for a fee. Assume that there is such a company, which has ample profits, and that it is called Company Y. After five years Company Z becomes profitable and starts paying dividends. Matters are arranged so that when Company Z pays dividends, Company X, which is the true parent, receives them.

Facts of example 2

Company X holds 100 £1 ordinary shares in Company Z.

The ordinary shares carry normal equity rights to share in profits.

Company Y holds 300 £1 participating preference shares in Company Z.

Each participating preference share is entitled to:

  • a fixed preferential dividend of 30p if there are sufficient distributable profits, and in addition,

  • 1p of every £100 distributed in excess of the fixed dividend.Under CTA10/S1119, participating preference shares count as ordinary shares. So, under CTA10/S1119 and CTA10/S1154, Company Y is a 75% shareholder in Company Z. This means Company Y and Company Z are members of a group within the terms of CTA10/S151(1).

    For the accounting period for which Company Y is seeking group relief, profits of Company Z are small or non-existent. But when Company Z becomes profitable and starts paying substantial dividends (and there is no more group relief to claim) Company X바카라 사이트™s predominant equity rights on the ordinary shares will ensure that it receives the lion바카라 사이트™s share of the dividends.

    If there are no profits, CTA10/S165(2)(b) requires a figure of £100 to be taken as the profits available for distribution. Of this £100, £90 (300 x 30p) will go to Company Y as a fixed dividend. Company Y will also receive 30p (300 x 1p x £10 / £100) from the distribution of the balance of £10. Company Y would thus be entitled to 90.3% of the distributable profits.

    But CTA10/S170 (CTM81060 to CTM81065) prevents Company Y being regarded as entitled to 90.3% of the distributable profits. Section 170 applies because the participating preference shares carry rights in respect of dividend which are partly limited by reference to a specified amount (the fixed dividend of 30p per share). CTA10/S170(2) applies, and the limited rights are treated as waived. So, on a distribution of £100, Company Y would be entitled to £3, and Company X would be entitled to the remainder of £97. By virtue of section 170(3) Company Y is treated as entitled to only 3% of the profits, the lesser of the two figures under:

  • section 165, that is £90.30, and
  • section 170(2), that is £3.Company Z will not therefore be treated as a 75% subsidiary of Company Y.