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If your business is thinking of making an intra-group transfer as part of a group reorganisation, a vital question is how this will impact your business’ tax liability. This article will explain some key legal concepts, such as those in tax law concerning tax liabilities for intra-group transfers. As a business owner, it should enable you to identify if two or more group companies form part of the same tax group for tax purposes. You can find more information on the kinds of tax relief arising from certain intra-group transfers in the second article for your business in this series.
Defining Group Companies
Generally, a reference to a group company or business group is a shorthand way of referring to a business comprising two or more individual companies, all of which are usually owned by the same shareholders.
Group Reorganisations and Intra-Group Transfers
Intra-group reorganisation refers to one company transferring assets to another group company. These usually arise as part of business disposal or restructuring. It is a group reorganisation, for example, if a manufacturing group transfers its manufactured products to its retail division.
ConsultCo Business Group
For example, imagine that you are the main shareholder and one of the directors of ConsultCo. ConsultCo has three business divisions:
- management consulting, which is its most established and profitable division;
- recruitment consulting; and
- ConsultCo Software Solutions (“CCSS”) provides software solutions to third parties and services the entire business group’s internal IT and software needs.
Each division is its own subsidiary company, the shares of which are owned by a parent company (“Consult MidCo”), which a holding company owns. CCSS is partly owned by another company called TechCo, which holds 49% of the company; Consult Co owns the rest. CCSS’s runs its operations from a subsidiary company, of which MidCo owns 80%.
Consult MidCo owns most of the business’ valuable assets, which it leases or provides on a licence as needed to the group subsidiaries. The exceptions are specific branding and intellectual property rights related to CCSS, which are all owned by CCSS’s HoldCo.
Below is a structure chart which sets out the group structure and extent of third-party ownership in CCSS.
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Tax Law for Group Companies
The following section explores specific legal concepts related to taxation for group companies. Before creating a corporate group as a business owner, you should understand these concepts.
Tax Group
The law assumes that each company within a group has its own tax liability. Therefore, we treat any transaction between group companies as if it were to a third party. The exception is if group companies within the same “tax group” carry out a transaction. The law provides for different tax groups depending on your business’s transfer.
Generally, we can divide groups into certain categories based on a threshold of the percentage of ordinary share capital a parent company has in its subsidiary. For example, we might describe a subsidiary as being either a:
- 51% subsidiary;
- 75% subsidiary; and/or
- 90% subsidiary.
Considering ConsultCo, we can say that Management Consulting Co Ltd and Recruitment Consulting Co Ltd are 90% of Consult MidCo because MidCo owns more than 90%.
It follows that these two subsidiaries are also 75% and 51% subsidiaries. In other words, if there is a tax exemption for a 75% subsidiary, a 90% subsidiary will also qualify for it.
ConsultCo Software Solutions HoldCo Ltd is a 51% subsidiary of MidCo only. ConsultCo Software Solutions Ltd (the subsidiary CCSS company) is both a 51% and 75% subsidiary of MidCo (but not 90%). The CCSS subsidiary does not meet the threshold for CCSS HoldCo because its shareholding is less than 51%.
Direct and Indirect Ownership
In some cases, the law distinguishes between direct and indirect ownership. In our example, ConsultCo HoldCo Ltd owns MidCo and has an indirect ownership in all the subsidiaries. HoldCo Ltd’s stake in the management and recruiting companies are indirectly 100%. Its ownership in CSSCO HoldCo is indirectly 51% because its ownership in MidCo is 100% (100% x 51% = 51%).
Beneficial Ownership
The law only recognises a business group between a parent company and its subsidiary where the parent company is the beneficial owner of its shares in the subsidiary.
If a company has beneficial ownership in another company, no other party has any sort of claim on the parent company’s shares in the subsidiary.
In practice, this is most relevant where your business is involved in business disposal. If, for example, ConsultCo agreed to sell MidCo’s remaining shares in CCSO HoldCo Ltd to TechCo, once the offer completes, there might be some time before the shares change hands. Nonetheless, MidCo and CCSSO HoldCo would cease to be part of the same tax group because there is a contract to sell its shares to TechCo.
Economic Ownership Tests
The law also states that a parent company must economically benefit from its subsidiary ownership. This requirement avoids creating artificial group structures and only applies to laws related to 75% and 90% subsidiaries.
The test asks if the parent company is entitled to at least 75% (or 90% if a 90% subsidiary) of the profits available to shareholders. If they pass the test, the parent and subsidiary are part of the same group, and if they fail, the companies are not part of the same group.
This is relevant when other shares or shareholder agreements are in place that override ordinary shareholders’ entitlement to the parent company’s entitlement to profits in the subsidiary.
Practical Implications
You must understand the law surrounding group companies and tax groups. That way, you can identify which companies in your business group are in the same tax group. This will ensure that you move assets around in the most efficient manner possible.
For instance, if there were a private agreement between ConsultCo and TechCo that TechCo gets priority on all dividends, even though it owns fewer shares in CCSS HoldCo, CCSS HoldCo and MidCo would not be part of the same tax group. If you wanted to move any assets from the CCSS division to MidCo, CCSSO HoldCo might be liable to pay tax.
Key Takeaways
The law surrounding a business’ tax liability for intra-group reorganisations is quite complex. However, if you run your business through a business group structure, you must understand and comply with these issues if you move any assets from one company to another. To understand your tax liability for different intra-group transfers and group reorganisations, you must first be able to identify if one company is part of the same group. If it is, you may be able to move business assets around without incurring any tax liability.
If you need help with taxation for intra-group transfers for your business, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
In the context of an intra-group transfer, a tax group is a group of companies that do not owe any taxes on the disposal of their assets, where they transfer them to another member of the group.
How do I know which group companies are part of the same tax group?
The rules depend on which sort of asset you are transferring, so it is wise to seek legal advice.
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