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EMI Independence Test

EMI Independence Test

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Company is owned as follows:

20% Shareholder X

20% Shareholder Y

20% Shareholder Z

40% Holding Company held 33% each by Shareholder X &Y& Z

Will this fail the EMI independence test given that any shareholder plus the other company would grant 60% control, although neither shareholder owns the holding company or has control of it?

Further to this when Shareholder X leaves in 5 years and another holding company is set up to buy his shares will this create a disqualifying event for the EMI given that it is expected to have a 5 year vesting period.

This will leave the company owned by:

40% Holding company 1

20% Holding company 2

20% Shareholder X

20% Shareholder Y

with the holding companies both owned 50/50 with shareholder X and Y.

Many thanks.



Replies (4)

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By taxguru
22nd Sep 2016 13:53

Independence requirement (s.9 Sch 5, ITEPA/03) has two conditions:

1. The company must not be a 51% subsidiary of another company (which it is not)

or otherwise under the control of another company or of another company and persons connected with it.

Looking at ‘control’ (s.995 ITA/07 - and connected persons (s993, s994) I would think that if any two of X,Y, or Z are ‘connected’ then this provision is hit. Alternatively, should they be acting together to exercise or secure the control of the company still they could be treated as ‘connected’. Otherwise No.

2. No arrangements must exist whereby the company could become such a subsidiary or fall under such control.

This is where I think it will get complicated. 5 years down the road HoldCo 1 and HoldCo2 will have common control and will together control (60%) the company.

Thanks (0)
By Practise_Accountant88
22nd Sep 2016 14:17

Thanks for your reply.
X Y & Z are not connected and all directors of the company.

Yeah that was why I was thinking of doing it through 2 separate holding companies.

It would not be a 51% subsidiary of another company and nor would it be under 51% control of any one connected party as Y and Z would essentially own 50% of the company, but the legislation is so specific I am worried this falls short.

Thanks (0)
By Steve Kesby
22nd Sep 2016 14:36

I think you may be trying to solve the wrong problem.

Why not just make life easy, issue further shares in the holding company to X, Y and Z in exchange for their shares in the subsidiary.

Why do X, Y and Z each have 20% interests in the subsidiary and 33% interests in the holding company, when just 33% interests in the holding company gives the same effects.

After such a restructure they would then own the holding company 33% each and the holding company would 100% own the subsidiary.

A new class of share in the holding company can then be created, that link only to the assets and profits of the subsidiary, and EMI options can be issued over those shares.

There won't then be any issue when X departs.

Thanks (1)
By Practise_Accountant88
22nd Sep 2016 15:09

Hi Steve,

I think this idea has real promise I still think there is a problem when X leaves however.

The cheapest way, I can see, would be for X to have his shares brought back by the holding company and apply for the capital treatment and therefore Entrepreneurs Relief. However this would create a disqualifying event for the holding company.

If directors Y & Z were to purchase X's shareholding off him directly then there would be no EMI complication but this would be expensive as they would need to draw the money out through dividends first to pay him off.

Is there a better alternative on how to buy out X in 5 years which is most tax efficient and non compromising for the EIS?

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