Exemption for disposals by companies of substantial shareholdings: an update

United Kingdom
The Government has issued revised draft legislation on the exemption for disposals by companies of “substantial shareholdings”. This update highlights some of the more important changes. In particular:

  • The percentage of ordinary shares held in order to qualify as a “substantial shareholding” is reduced from 20% to 10%. The economic ownership tests are also reduced from 20% to 10%. There was some concern that the 20% test would not cover all structural holdings. Nevertheless, it was expected that a reduction to 10% might be accompanied by an additional test, for example, the requirement that the investing company should have the right (and does in fact) appoint a director: no such additional test has been introduced.

  • The revised legislation expressly provides for all intra-group activities to be disregarded in determining whether a member is a “trading company” or a member of a “trading group”. For example, intra-group leases as well as the holding of shares and subsidiaries are ignored and this also means that a “pure” holding company can be regarded as a member of a “trading group”.

  • The Government has revised the provisions that relate to a joint venture company (JVC). Under the previous draft legislation, where the investing company held a substantial shareholding in the JVC but that holding was less than 30% then the activities of the JVC were disregarded in determining whether the investing company was a trading company or member of a trading group. The revised legislation aligns the definition of a JVC to that of a substantial shareholding (ie 10%) so that the activities of the JVC will be taken into account in assessing the activities of the group as a whole.

  • Under the previous draft legislation, the company invested in was required to carry on a trade in order to be a “qualifying trading company” or was required to be a holding company of a trading company in order to be a “qualifying holding company”. Investment activities of any kind may prevent a company from being a “qualifying trading company” if they are “substantial”. However, in addition, certain activities carried on in the course of a trade would only be regarded as trading activities if carried on by “finance companies”. These “excluded activities” included holding and dealing in shares and securities, holding intellectual property and the leasing of any kind of property. The Government has listened to representations that this would give rise to various anomalies and has revised the draft legislation by removing the concept of “excluded activities” altogether.
The above changes are, in general, to be welcomed. Nevertheless, the Government did not take on board all the suggestions made in representations made to them. In particular:

  • The Government has retained the requirement that the investing company must be a trading company or a member of a trading group immediately after the disposal of the substantial shareholding. This means that a holding company which disposes of a single subsidiary will not be a member of a trading group immediately after and will not qualify for the relief, thereby putting the UK at a disadvantage when compared with the Netherlands or Luxembourg.

  • The Government has rejected representations for the retention of the right to specify a time earlier than the time for the making of a negligible value claim. This means that a negligible value claim must be made before 1 April 2002 in order to crystallise and take the benefit of a loss on a substantial shareholding of negligible value.
The issue of the revised draft legislation quells the speculation that its introduction might have been postponed. Whilst the latest publication is, of course, still only draft legislation and must go through the usual parliamentary process before becoming law, it is thought unlikely that there will be any further significant changes. For practical purposes, it would be reasonable to assume that the revised draft legislation will take effect from 1 April 2002 (albeit that it will not be formally enacted until late July 2002).

The above is intended as a summary only and not a substitute for detailed advice.

For further information, please contact Simon Meredith at simon.meredith@cms-cmck.com or on +44 (0)20 7367 2959 or Mike Boutell at mike.boutell@cms-cmck.com or on +44 (0)20 7367 2218.