The UK offers many advantages as an international holding company jurisdiction which includes the absence of withholding tax on dividend payments to anywhere in the world, broad exemptions from taxation on dividends received and one of the most extensive tax treaty networks in the world. In addition, Finance Bill 2017 included updates which served to make the UK even more attractive in this area with effect from 1 April 2017.
Basis For Reform
The Substantial Shareholder Exemption (SSE) broadly provides an exemption from taxation on capital gains realised on the disposal of underlying shareholdings, subject to satisfaction of certain criteria (see below).
Reform has been implemented in this area as the existing SSE regime was perceived as being more complex and narrow in its application, in comparison to equivalent exemptions in other jurisdictions.
It was also intended that by widening the scope of SSE, the UK's attractiveness as a holding company location for groups with substantial investment activities will be increased and may assist in reducing the risk of UK headquartered groups migrating out of the UK.
Previous SSE Regime
Prior to the changes, SSE was available to a UK resident ‘investing’ company that makes a disposal of shares in an underlying ‘investee’ company where the following conditions were met:
- the investing company was required to hold at least 10% of the ordinary share capital in the investee company throughout a continuous period of 12 months (beginning not more than 2 years prior to disposal);
- the investing company was required to either be a trading company or a member of a trading group throughout the “qualifying period” (e. beginning with the start of the 12 month period for which the substantial shareholding requirement was met) and immediately after the disposal; and
- the investee company was required to be a trading company or the holding company of a trading group/subgroup throughout the qualifying period and immediately after the disposal or must otherwise be liquidated as soon as practicable post where these trading requirements cease to be met.
Since 1 April 2017, the updated conditions for application of the SSE, which apply to disposals occurring from this dat,e are briefly summarised as follows:
- the condition that the company making the disposal must be a trading company or member of a trading group has been withdrawn;
- the condition that the company being sold must meet the trading condition immediately after the disposal has also been withdrawn, provided the disposal is to an unconnected person;
- the exemption has been extended to disposals of shareholdings of less than 10%, provided at least 10% was held for a 12 month period within the 6 years up to the disposal;
- the condition that the company being sold must be a trading company or holding company of a trading sub-group has also been withdrawn for companies owned by qualifying institutional investors.
A Simplified Regime
These reforms have served to remove uncertainties in areas which, amongst others, include determining whether the investing company is part of a trading group. They have also enhanced certainty regarding the SSEs application, where the investing company has ongoing knowledge or control over the investee company once it has been sold to a third party.
The extension of the 12 month holding requirement (in the 2 year period prior to disposal) to a 6 year period is expected to prove much less restrictive in nature and application, particularly where the disposal is required to be fragmented over an extended timescale.
Furthermore, the reforms have simplified the SSE regime by removing or modifying conditions which increased administrative burdens. It is further anticipated that they serve to introduce a new and simpler exemption for companies owned by certain defined institutional investors, promoting the UK as a place where global investors can establish and manage their investments in trading businesses, infrastructure projects and real estate.