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Capital contribution reserve - Tax effect

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I have a client that is a holding company for various subsidiaries. There is no revenue generated within this entity, its only activity is investing in its subsidiaries.

The client has its own ultimate parent who is gifting the client large sum of money unconditionally with no intention by either parties for it to be repaid, nor any shares received in exchange. This all points to capital contribution reserve. The money will be used by the client to invest in its own subsidiaries.

My question is what are the tax implications, if any, of this money received? I read somewhere that there is a risk that capital contributions can be taxed as trading income in the hands of the recipient if its a trading company. Does investing in its subsidiaries fall into that?

If there is a tax liability, how is that any different to the client & its parent claiming for it to be an intercompany loan instead and subsequently write off in a few years, given it would then be tax nothing?

Many thanks in advance for all your help.

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By Paul Crowley
08th Oct 2020 13:48

Any idea who thought of this?
Why not just a loan?

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Replying to Paul Crowley:
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By Jacksm19
08th Oct 2020 13:54

I guess because it isn't a loan and will never be repaid.

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By Paul Crowley
08th Oct 2020 14:21

No idea if group is all UK
Quite relevant really
Is ultimate parent looking to get tax relief on its gift?
Why is it thowing money away?

What is ultimate parent company intention

Best look at moneylaundering issues urgently
Does not yet pass the sniff test unless you know what the parent is doing.
Where did the money come from?

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Replying to Paul Crowley:
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By Jacksm19
08th Oct 2020 14:56

Ultimate parent is outside the EU. Very valid point but from our understanding it has no intention to obtain tax relief (and they are audited by one of the big 4). Their treatment would be a debit to investments in subsidiaries. The ultimate parent is a very large and profitable company and that is its source of funds.

They are providing money to the UK holding for it to become an investment vehicle in its own right. The UK company will use the money to create its own sub-group, with its subsidiaries carrying out vast trading activities.

I guess ultimately dividends will be hived back up to the ultimate parent in the long run once the investments are fruitful.

(Thanks for your interest & advice in this matter)

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By johnt27
08th Oct 2020 16:09

This is one of the fun things about dealing with international groups. Many jurisdictions, not the UK, have clearly defined rules (tax and corporate) regarding capital contributions.

In the UK the concept of a capital contribution is somewhat vague, so you end up reverting to every accountant's favourite bedtime reading document TECH 02/10, which became TECH 05/16 and then TECH 02/17.

These types of "capital contribution" are generally not deemed to be realised profits (para 9.53 of the above technical release) and as a result are not taxable (s322 of CTA 2009 sub section 4). However, this really depends on how this was structured as if cash is simply transferred across to the sub then this is a realised profit, and potentially taxable.

How you subsequently classify the above in equity is an interesting conceptual argument. Some would suggest it's a seperate reserve, others part of share premium if it's not a recognised profit, others in P&L reserve if it is a recognised profit. These transactions occur only in the SOCIE not in P&L or SOCE.

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By Paul Crowley
08th Oct 2020 16:41

My reading was also that peculiar in UK, but more common abroad.

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By Jacksm19
12th Oct 2020 13:09

Thanks Paul and John. This is exactly the problem and it all comes back to interpretation and perspective.

But we can't afford to leave any loose ends for fear of future problems. I'll be seeking further specialist advise and will take it from there.

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By Montrose
12th Oct 2020 12:15

This looks like the exploitation of a mismatch between tax practices in two countries.

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Replying to Montrose:
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By Jacksm19
12th Oct 2020 13:05

The parent handing the money is not seeking any tax relief from these investments they're making. They've recognised it as investment in group undertakings in the balance sheet.

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