Revenue Note for Guidance

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Revenue Note for Guidance

835AA Associated enterprises

Summary

This section sets out the relevant definitions and test(s) for determining associated enterprises.

Details

(1) Definitions

“consolidated group for financial accounting purposes” means a group consisting of -

  1. a parent entity, and
  2. all other entities, other than non-consolidating entities,

which are included in the same consolidated financial statements.

“non-consolidating entity” means an entity that is (or would be) valued in consolidated financial statements –

  1. using fair value accounting, or
  2. on the basis that it is an asset held for resale or held for distribution

all within the meaning of international accounting standards. Essentially the results of the entity are not included on a line by line basis within the consolidated income statement or consolidated statement of financial position but rather the entity is valued separately on the face of the statement of financial position.

“parent entity” means an entity that prepares, or would prepare, consolidated financial statements under generally accepted accounting practice.

“significant influence in management of” means the ability to participate on the board of directors or equivalent governing body of the entity and in the financial and operating policy decisions of that entity, including where that power does not extend to control or joint control of that entity.

(2) Tests for associated enterprises

Enterprises shall be associated enterprises –

(a) where one enterprise directly or indirectly, possesses or is beneficially entitled to—

  1. not less than 25 per cent of the issued share capital of the other enterprise, or
  2. where the other enterprise is an entity not having share capital, an interest of not less than 25 per cent of the ownership rights in an enterprise,

(b) if one enterprise, directly or indirectly, is entitled to exercise not less than 25 per cent of the voting power in the other enterprise, where that other enterprise is an entity,

(c) if one enterprise directly or indirectly, holds such rights as would—

  1. entitle them, directly or indirectly, to receive 25 per cent or more of the distributed profits of the other enterprise where the other enterprise is a company, or
  2. where the other enterprise is an entity other than a company, if the share of the profits of that other enterprise to which the they are entitled to either directly or indirectly is 25 per cent or more,

(d) where the two enterprises are, in accordance with paragraph (a), (b) or (c), associated to a third enterprise

(e) where both enterprises –

  1. are entities, and
  2. are part of the same consolidated group for financial accounting purposes.

(f) Where both enterprises –

  1. are entities, and
  2. would, if consolidated financial statements were prepared under international accounting standards, be part of the same consolidated group for financial accounting purposes.

(g) where one enterprise has significant influence in the management of the other enterprise.

(3) Where an enterprise acts together with another enterprise with respect to voting rights, share ownership rights or similar ownership rights, the enterprise shall be treated, for the purposes of the tests in (a), (b) and (c) of subsection (2), as possessing, holding or being entitled to the rights of each other.

(4) For the purposes of the tests set out in (a), (b) and (c) of subsection (2), the rights or powers of a nominee of an enterprise shall be attributed to that enterprise

(5) For the purposes of—

  1. Chapter 2 (Double Deduction),
  2. Chapter 3 (Permanent Establishments),
  3. Chapter 8 (Imported mismatch outcomes), and
  4. the application of this Part to hybrid entities,

a reference, in subsection (1), to ‘25 per cent‘ shall be substituted by ‘50 per cent’.

(6) Subject to subsection (7), references to a transaction between associated enterprises includes transactions where the enterprises concerned are or were associated enterprises at the time—

  1. the transaction was entered into,
  2. the transaction was formed, or
  3. a payment arises under the transaction.

(7) References to a transaction between associated enterprises shall not include a transaction between enterprises who were associated at the time the transaction was entered into or formed, but are neither –

  1. associated enterprises at the time the payment arises under the transaction, nor
  2. associated enterprises at the time a deduction in respect of the payment in (a) arises.

and it is reasonable to consider that the enterprises ceased to be associated for bona fide commercial reasons and not to avoid the application of this Part.

Relevant Date: Finance Act 2021