What does section 486E of the Corporation Tax Act 2009 do?

Section 486E excludes straightforward share investments from the disguised interest rules in Chapter 2A. It applies where an arrangement involves only relevant shares held throughout the relevant period and the return reflects solely an increase in the fair value of those shares, including where part of that increase is paid out as a dividend.

What counts as a relevant share under section 486E CTA 2009?

There are two categories. First, fully paid-up shares in a connected company, a relevant joint venture company or a controlled foreign company. Second, shares in any other company where the issuer would account for those shares as a financial liability under generally accepted accounting practice and they produce a return economically equivalent to interest.

How does section 486E define a relevant joint venture company?

A relevant joint venture company is one where the holding company and one other person together control it. The holding company must hold at least 40% of the relevant interests, rights and powers, and the other person must hold between 40% and 55%. Control is determined using the controlled foreign company rules in sections 371RB and 371RD of TIOPA 2010.

Can the section 486E exclusion apply to repo arrangements?

No. The legislation specifically disapplies the deeming provision in section 550(3), which would otherwise treat a company as still holding shares sold under a repo. This means neither the original owner nor the temporary owner under a repo can rely on the excluded shares exemption in section 486E.

Corporation Tax Act 2009 section 486E

Excluded shares

Section 486E provides an exclusion from the disguised interest rules (Chapter 2A) for straightforward share investments in connected companies, joint ventures and controlled foreign companies where the only return is an increase in the fair value of those shares.

The disguised interest rules do not apply where an arrangement involves only "relevant shares" held throughout the relevant period and the return reflects solely an increase in the fair value of those shares, including where part of that increase is paid out as a dividend.
Relevant shares are either fully paid-up shares in a connected company, a relevant joint venture company or a controlled foreign company, or shares in any other company that the issuer would account for as a liability and that produce a return economically equivalent to interest.
A relevant joint venture company is one where the holding company and one other person together control it, with the holding company holding at least 40% and the other person holding between 40% and 55% of the relevant interests, rights and powers.
The repo deeming rule that treats a borrower as still holding shares it has sold does not apply for these purposes, meaning this exclusion cannot be used by either party to a repo arrangement.

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