Acquisitions Workshop 8
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If Y Limited is a trust company which holds all of the shares in X Limited, is X limited classified as a subsidiary of Y Limited in accordance with s.1159 CA 2006?
No. Shares held in a fiduciary capacity will not be treated as held in Y Limited
What parts of the companies act define a subsidiary?
s1159 and Schedule 6
Can directors get shareholders to ratify a breach of duty?
Yes - see s180(4) if technically within the company's memorandum even if done to serve a purpose other than the interests of the company (Rolled Steel)
The directors can also ask for a prospective ratification of a proposed act (Hogg v Crampton)
When can companies surrender trading losses to another company?
- When they are in the same group for the purposes of group relief (s402(2) ICTA 1988)
- A company is in the same group as another for ICTA 1988 purposes is one is a 75% subsidiary of another or both are 75% subsidiaries of a third company. Share ownership can be direct or indirect.
Can trading loss surrended by group relief to another company be carried forward?
Is a group for the purposes of ICTA 1988 also a group for the purposes of TCGA 1992?
No. They have different definitions. Check what you are thinking about:
- - If it is for group relief use ICTA 1988 definition
- - If it is for relief from capital gains use TCGA definition
What is the definition of a group for the purposes of s170 TCGA 1992
A company forms a group with all its 75% subsidiaries and their 75% subsidiaries provided they are 51% subsidiaries (directly or indirectly) of the principal company.
- The company must be:
- - A 75% subsidiary of one of its subsidiaires AND
- - A 51% subsidiary of the parent company
How are assets transferred between companies that form a group under s170 TCGA 1992 charged for tax? What does this mean?
Transfers are tax neutral.
This means that any gain that would otherwise arise will be deferred until such time as the asset leaves the group and will be determined at that time by the price paid for the asset when it entered the group or, if a company that receives it moves out of the group within 6yrs, then at that point (degrouping charge)
When is a degrouping charge treated as arising?
Immediately after the start of the accounting period of the company in which it ceases to be a member of the group
Give 3 reasons why a seller may wish to re-organise its group prior to sale
- 1. To create a new separate unit prior to sale
- 2. To allow the sale to organise the sale based on which assets the buyer wants
- 3. To ensure the target it sold as a self-contained unit by transferring rights held by parent to subsidiairy (e.g. IP, License)
Give 2 reasons why a buyer may wish to reoganise its group prior to a purchase
- 1. To ingergrate the purchase into an existing group
- 2. To adapt to ongoing commercial needs
When will a tax charge arise under s170 TCGA 1992?
- - When the asset is sold out of the group OR
- - If the company which received the asset transfers out of the group within 6yrs
Can a company be in more than one group for the purposes of s.170?
No. It normally forms the head of its own group.
When an asset has been transferred around the group on a tax neutral basis under s.170 TCGA 1992, what acquisition price will be used for the base cost when it is sold out of the group?
The acquisition price it was originally acquired at by the first group company that acquired it
Why may a 3rd party buyer of a subsidiary of a s.170 group want a tax indemnity?
Because if that subsidiary owns group assets then, once it leaves the group, it will have to pay tax on them (degrouping charge) which the new owner will be liable for
When does s845 apply to a distribution?
- 1. When there is positive distributable profits AND
- 2. Based on amount determined the distribution coiuld legally be made
Where s.845 CA 2006 applies, when will the amount of distribution be zero?
If the consideration is NOT LESS THAN book value (s845(2)(a)) and the distribution can be lawfully made
Where s.845 applies, when will the amount of distribution NOT be zero? What will the amount of distribution be? Will this be a problem?
If the consideration is less than book value. The amount of distribution will be the difference between book value and consideration given (s845(1)(b))
If there are insufficient distributable profits to pay this amount then s845 cannot apply and this is a problem as it will mean the distribution is unlawful
Under CA 2006, who do provisions on financial assistance apply to?
Public companies and the subsidiaries of public companies
To be an effective 51% subsidiary for the purposes of s170 TCGA 1992, what must the principal company be entitled to?
50% of any profits available for distribution and more thsn 50% of any assets available for distribution on winding up
NOTE - all companies must be UK companies
When can a company which is a 75% subsidiary of another company be the head of its own group for the purposes of s.170 TCGA 1992?
When it is prevented from being part of the group of the principal company because iot fails the effective 51% subsidiary test
When there is a de-grouping charge, how is the gain calculated?
The subsidiary that bought it is deemed to have sold it and immediately repurchased it at the time it was bought.
E.g. It was bought for £1.8 million by company A and was originally acquired for the group at £1.6 and is now worth £2.2
The gain is the difference between 1.8 and 1.6.
The gain is deemed to be made AT THE TIME A LEFT THE GROUP
When assets are sold inter-group and then a subsidiary is sold, what must you consider?
- 1. De-grouping charges
- 2. Unlawful distributions
- 3. Directors duties and ratification
- 4. Financial assistance
Also best to check for SPTs
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