831B. Participation exemption for certain foreign distributions

(1) In this section—

“EEA Agreement” means the Agreement on the European Economic Area signed at Oporto on 2 May 1992, as adjusted by all subsequent amendments to that Agreement;

“EEA state” means a state which is a contracting party to the EEA Agreement;

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“excluded acquisition” means an acquisition by a company of—

(a) another business or part of another business, or

(b) the whole or greater part of the assets used for the purposes of another business,

where the business concerned was previously carried on by another company (in this definition referred to as ‘the second-mentioned company’) that was not resident in the State or that was not, by virtue of the law of a relevant territory, resident for the purposes of foreign tax in a relevant territory—

(i) from the date the reference period commences until the date the acquisition takes place, or

(ii) where the second-mentioned company was incorporated or formed during the reference period, from the date the second-mentioned company was incorporated or formed until the date the acquisition takes place,

but does not include the acquisition by a company of share capital in another company;

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“foreign tax”, in relation to a territory other than the State, means a tax which—

(a) corresponds to corporation tax in the State,

(b) generally applies to income, profits and gains arising to a company that is resident for the purposes of tax in that territory, and

(c) is imposed at a nominal rate greater than zero per cent;

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“foreign withholding tax” means a tax which—

(a) is directly chargeable on a distribution made by a company that is, by virtue of the law of a territory other than the State, resident for the purposes of foreign tax in that territory, to a company that is not so resident, whether by charge to tax, deduction of tax at source or otherwise, and

(b) is imposed at a nominal rate greater than zero per cent;

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“listed territory” has the same meaning as it has in section 835YA subject to the modification that references to ‘an accounting period beginning’ shall be read as references to ‘the making of a distribution’;

“parent company”, in relation to a relevant subsidiary, means a company that holds a qualifying participation in the relevant subsidiary and—

(a) is resident in the State, or

(b) not being resident in the State—

(i) is, by virtue of the law of an EEA state, resident for the purposes of foreign tax in the EEA state, and

(ii) is not generally exempt from foreign tax;

“qualifying participation” shall be construed in accordance with subsection (2);

“reference period”, in relation to a relevant distribution, means the period of ^[4]>5 years^<[4][4]>3 years^<[4] immediately before the date on which the relevant distribution is made;

“relevant distribution” means a distribution, or that part of a distribution, that—

(a) constitutes income in the hands of the recipient for the purposes of corporation tax, and

(b) is made by a relevant subsidiary in respect of the relevant subsidiary’s share capital—

(i) out of the profits (within the meaning of section 21B(1)(a)) of the relevant subsidiary, or

(ii) ^[5]>where subparagraph (i) does not apply,^<[5] out of the assets of the relevant subsidiary where the cost of the distribution, or that part of the distribution, as the case may be, falls on the relevant subsidiary,

but, without prejudice to the generality of paragraphs (a) and (b), does not include—

(I) a distribution, or that part of a distribution, that has been, or may be, deducted for the purposes of tax in any territory outside the State under the law of that territory ^[6]>other than a tax that is similar or corresponds to the surcharge referred to in section 440 and which is imposed on a company where the greater part of the issued share capital of the company or the greater part of the voting power in the company is held by 5 or fewer individuals^<[6],

(II) a distribution in a winding up,

(III) any interest or other income from debt claims providing rights to participate in a company’s profits (within the meaning of section 21B(1)(a)),

(IV) any amount considered to be interest equivalent (within the meaning of section 835AY), or

(V) any dividend paid or other distribution made by an offshore fund as construed in accordance with section 743;

“relevant period”, in relation to a relevant distribution, means the period—

(a) beginning on the date—

(i) that is ^[7]>5 years^<[7][7]>3 years^<[7] immediately before the date on which the relevant distribution is made, or

(ii) on which the relevant subsidiary making the relevant distribution was incorporated or formed,

whichever is the later, and

(b) ending on the date on which the relevant distribution is made;

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“relevant subsidiary”, in relation to a relevant distribution, means a company that—

(a) is, on the date on which it makes the relevant distribution and was, throughout the relevant period—

(i) by virtue of the law of a relevant territory, resident for the purposes of foreign tax in the relevant territory, and

(ii) not generally exempt from foreign tax,

(b) did not, at any time during the reference period, acquire—

(i) another business or part of another business, or

(ii) the whole or greater part of the assets used for the purposes of another business,

where the business concerned was previously carried on by another company that was not, by virtue of the law of a relevant territory, resident for the purposes of foreign tax in a relevant territory—

(I) from the date the reference period commences until the date the acquisition referred to in subparagraph (i) or (ii) takes place, or

(II) where the other company was incorporated or formed during the reference period, from the date the other company was incorporated or formed until the date the acquisition referred to in subparagraph (i) or (ii) takes place,

and

(c) was not formed through a merger at any time during the reference period, where a party to the merger was another company that was not, by virtue of the law of a relevant territory, resident for the purposes of foreign tax in a relevant territory—

(i) from the date the reference period commences until the date the merger takes place, or

(ii) where the other company was incorporated or formed during the reference period, from the date the other company was incorporated or formed until the date the merger takes place;

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“relevant subsidiary”, in relation to a relevant distribution, means a company that—

(a) is, on the date on which it makes the relevant distribution—

(i) by virtue of the law of a relevant territory, resident for the purposes of foreign tax in the relevant territory, and

(ii) not generally exempt from foreign tax,

(b) throughout the relevant period—

(i) was—

(I) by virtue of the law of a relevant territory, resident for the purposes of foreign tax in the relevant territory, and

(II) not generally exempt from foreign tax,

or

(ii) was resident in the State,

(c) did not, at any time during the reference period, make an excluded acquisition, and

(d) was not formed through a merger at any time during the reference period, where a party to the merger was another company (in this paragraph referred to as ‘the second-mentioned company’) that was not resident in the State or that was not, by virtue of the law of a relevant territory, resident for the purposes of foreign tax in a relevant territory—

(i) from the date the reference period commences until the date the merger takes place, or

(ii) where the second-mentioned company was incorporated or formed during the reference period, from the date the second-mentioned company was incorporated or formed until the date the merger takes place;

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“relevant territory” means—

(a) an EEA state other than the State,

(b) not being such an EEA state, a territory with the government of which arrangements having the force of law by virtue of section 826(1) ^[8]>have been made, or^<[8][8]>have been made,^<[8]

(c) not being a territory referred to in paragraph (a) or (b), a territory with the government of which arrangements have been made which on completion of the procedures set out in section 826(1) will have ^[9]>the force of law,^<[9][9]>the force of law, or^<[9]

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(d) not being a territory referred to in paragraph (a), (b) or (c), a territory (referred to in this section as a ‘specified territory’) which generally imposes a foreign withholding tax on distributions,

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but does not include a listed territory.

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(1A) For the purposes of the definition, in subsection (1), of “relevant territory”, a territory referred to in paragraph (b) or (c), as the case may be, of that definition shall be regarded as a relevant territory from the date that is 3 years immediately preceding the date on which the arrangements referred to in the said paragraph (b) or (c), as the case may be, have been made.

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(2) (a) For the purposes of this section, a company shall be regarded as holding a qualifying participation in a relevant subsidiary where the company directly or indirectly owns ordinary share capital in the relevant subsidiary, by virtue of which the company—

(i) owns not less than 5 per cent of the ordinary share capital of the relevant subsidiary,

(ii) is beneficially entitled to not less than 5 per cent of the profits available for distribution to equity holders of the relevant subsidiary, and

(iii) would be beneficially entitled on a winding up of the relevant subsidiary to not less than 5 per cent of the assets available for distribution to equity holders of the relevant subsidiary.

(b) For the purposes of paragraph (a)—

(i) subsections (2) to (10) of section 9 shall apply with any necessary modifications,

(ii) the following shall not be included for the purposes of determining whether a company holds a qualifying participation in a relevant subsidiary:

(I) share capital in the relevant subsidiary that the company owns directly if a profit on a sale of those shares would be treated as a trading receipt of the company’s trade;

(II) share capital in the relevant subsidiary that the company owns indirectly and which—

(A) is owned through another company that is not resident in the State or that is not, by virtue of the law of a relevant territory, resident for the purposes of foreign tax in the relevant territory, or

(B) is owned directly by another company for which a profit on the sale of the shares in the relevant subsidiary by that other company would be a trading receipt of that other company,

and

(iii) sections 413 to 419 shall apply with any necessary modifications as they apply for the purposes of Chapter 5 of Part 12 but—

(I) without regard to paragraph (c) of section 411(1) in so far as that paragraph relates to those sections, and

(II) as if the following subsection were substituted for subsection (1) of section 419:

‘(1) In this Chapter, “the relevant accounting period” means the accounting period current at the time in question.’.

(3) Where in an accounting period—

(a) a relevant subsidiary makes a distribution to a parent company of the relevant subsidiary that is, or part of which is, a relevant distribution, and

(b) the parent company would, but for this section, be chargeable to corporation tax in respect of the relevant distribution under—

(i) Case III of Schedule D and the amount on which the parent company would be chargeable to corporation tax would not be computed in accordance with the provisions applicable to Case I of Schedule D, or

(ii) Case IV of Schedule D in accordance with section 138,

then, subject to subsections (5) to (8), and except where otherwise provided by the Corporation Tax Acts, corporation tax shall not be chargeable on the relevant distribution and the relevant distribution shall not be taken into account in computing income for corporation tax.

(4) Without prejudice to the generality of any other provision of the Tax Acts, where in any case a parent company is not chargeable to corporation tax on a relevant distribution by virtue of this section, that parent company shall not be entitled to a deduction, reduction, credit or other relief for tax paid under the laws of a relevant territory in respect of that relevant distribution.

(5) Subsection (3) shall apply only—

(a) where the parent company holds a qualifying participation in the relevant subsidiary for an uninterrupted period of not less than 12 months, being a period during which ^[12]>the relevant distribution is made, and^<[12][12]>the relevant distribution is made,^<[12]

(b) if the relevant distribution is made by the relevant subsidiary in respect of the relevant subsidiary’s share capital out of the assets of the relevant subsidiary, ^[13]>other than out of the profits (within the meaning of section 21B(1)(a)) of the relevant subsidiary,^<[13] where any gain on the disposal of that share capital by the parent company on the date on which the relevant distribution is made would not be a chargeable gain in accordance with ^[14]>section 626B.^<[14][14]>section 626B, and^<[14]

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(c) if the relevant subsidiary that makes the relevant distribution is, by virtue of the law of a specified territory, resident for the purposes of foreign tax in the specified territory on the date on which it makes the relevant distribution, where foreign withholding tax has been paid by the relevant subsidiary on the full amount of the relevant distribution and has not been and does not fall to be repaid, in whole or in part, to any person.

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(6) Subsection (3) shall not apply to a relevant distribution made to—

(a) an assurance company where the relevant distribution is taxable in accordance with the provisions of Chapters 1 and 3 of Part 26, or

(b) an undertaking for collective investment (within the meaning of section 738) which is a company.

(7) (a) Subsection (3) shall not apply to a relevant distribution which arises in respect of an arrangement, or part of an arrangement, which—

(i) has been put in place for the main purpose of, or one of the main purposes of which is, obtaining a tax advantage, and

(ii) is not genuine having regard to all the facts and circumstances.

(b) For the purposes of paragraph (a)(ii), an arrangement, or part of an arrangement, as the case may be, shall be regarded as not genuine to the extent that it is not put into place for valid commercial reasons which reflect economic reality.

(8) (a) Subsection (3) shall not apply in respect of a relevant distribution made by a relevant subsidiary to a parent company unless the parent company makes a relevant claim for the accounting period in which the relevant distribution is made.

(b) In this subsection, “relevant claim”, in relation to an accounting period, means a claim made by a parent company in respect of all the relevant distributions made to that parent company in the accounting period by the relevant subsidiaries in respect of which that parent company holds a qualifying participation.

(c) A relevant claim for an accounting period shall be made in the return required to be delivered under Part 41A in respect of the accounting period.

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(9) For the purposes of this section, where the law of a relevant territory does not determine the residence of a company for the purposes of foreign tax and the company is not resident for the purposes of foreign tax in another relevant territory by virtue of the law of that other relevant territory, then—

(a) that company shall be regarded as resident for the purposes of foreign tax in the relevant territory where that company is regarded as so resident for the purposes of any arrangements having the force of law by virtue of section 826(1), and

(b) that company shall be regarded as not generally exempt from foreign tax where that company is not generally exempt from a tax which—

(i) corresponds to corporation tax in the State,

(ii) generally applies to income, profits and gains arising in the relevant territory referred to in paragraph (a), and

(iii) is imposed at a nominal rate greater than zero per cent.

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