Revenue Note for Guidance

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Revenue Note for Guidance

835Y Relief on certain disposals of shares or securities in a controlled foreign company

Summary

This section applies where a controlling company or a company connected with the controlling company, disposes of shares in a CFC or a connected company, and the controlling company has previously been subject to a CFC charge in relation to that CFC. This provision reflects the fact that profits available for distribution can affect the share value. Therefore, the section calculates an amount that will be allowable as a deduction against the chargeable gain before calculating the tax due. An amount to be allowed as a deduction can only be allowed once.

Details

(1) “chargeable gain” has the meaning given to it in section 545.

(2) This section applies where a controlling company or a company connected with the controlling company (referred to as a ‘‘disposing company’’), disposes of shares or securities in a CFC or a company connected with the CFC (referred to as a ‘‘disposed company’’) and the disposing company has previously been subject to a CFC charge in relation to that CFC by reference to its interest in it.

(3) Subsection (3) sets out three instances where the section applies, involving the disposing company and chargeable company, where they are and are not the same entity as follows:

  • where the disposing company is the only chargeable company in relation to the CFC,
  • where the disposing company is not the chargeable company in relation to the CFC and the chargeable company does not have any interest in the CFC, or
  • where the disposing company is a chargeable company in relation to the CFC and there is another chargeable company in relation to the CFC but it does not have an interest in the CFC.

(4) Depending on the circumstances of the disposing company and the chargeable company one of two formulae may be applied in order to calculate a proportionate CFC charge amount, by reference to the CFC charge and the proportion of the shareholding being disposed of, that will be allowable as a deduction against the consideration in computing the chargeable gain that may arise to a disposing company on the disposal of shares or securities in the CFC.

Where a scenario under subsection (3) applies an amount calculated in accordance with the following formula shall be allowed as a deduction against the consideration for the disposal–

  1. A x (B/C) where–
  2. A is equal to the CFC charge relating to the CFC,
  3. B is equal to the number of shares/securities in the CFC being disposed of by the disposing company, and
  4. C is equal to the total number of shares/securities held by the disposing company in the CFC immediately before the disposal,

Or

where none of the scenarios under subsection (3) apply, an amount calculated in accordance with the following formula shall be allowed as a deduction against the consideration for the disposal–

  1. D x (E/F) where
  2. D is equal to the CFC charge relating to the CFC,
  3. E is equal to the number of share/securities in the CFC being disposed of by the disposing company, and
  4. F is equal to the total number of share/securities in the CFC.

(5) In order to avoid a double deduction being taken, where relief has already been granted in accordance with section 835X before the disposal, any relief available in accordance with this section shall be proportionately reduced by an equivalent amount.

The section provides that the CFC charge referred to as ‘‘A’’ and ‘‘D’’ in the formulae shall be proportionately reduced by any CFC charge amount that relates to a distribution, made by the CFC, where that distribution formed part of the chargeable income that was subject to the CFC charge and where relief under section 835X was available, the balance would be available under subsection (4).

The reference to the CFC charge in paragraphs (a) and (b) of subsection (4) shall reflect an amount of CFC charge as reduced by the amount that corresponds to the chargeable income represented by the distribution relating to the CFC.

(6) In order to prevent a double deduction being taken, where an amount equivalent to all, or part, of a CFC charge has been taken as a deduction under subsection (4) then no further deduction shall be given.

Where the amount taken as a deduction under subsection (4) is equal in amount to the CFC charge, no further deduction shall be given in respect of the CFC charge, or where the amount taken as a deduction under subsection (4) represents part of the CFC charge, no further deduction shall be given in respect of that part of the CFC charge.

(7) The ‘‘first in, first out’’ principle applies so that shares/or securities bought earlier shall be deemed to have been disposed of before shares acquired at a later time.

Section (2) of section 27 of the Finance Act 2018 is the commencement section and provides that a “controlling company” has the same meaning as it has in Chapter 1 of this Part, and “accounting period” has the same meaning as it has in section 27 of the Principal Act.

The section applies in respect of an accounting period of a controlling company commencing on or after 1 January 2019.

Relevant Date: Finance Act 2021