Corporation Tax Act 2010 section 1037

Requirement as to reduction of seller's interest as shareholder

Section 1037 sets out the conditions that must be met regarding the reduction of a seller's shareholding when a company purchases its own shares, in order for the payment to be treated as a capital transaction rather than a distribution.

• After the share purchase, the seller's shareholding must fall to no more than 75% of what it was before the purchase, measured by nominal value as a fraction of issued share capital.
• Where the seller's associates also hold shares in the company, the combined interests of the seller and their associates must also be substantially reduced by the same 75% test.
• The seller's interest is measured before and after the purchase by comparing the nominal value of shares held as a fraction of the company's total issued share capital at each point in time.
• Additional rules may modify or relax these requirements, including where the company is a member of a group or where the seller has entitlements to profits beyond their nominal shareholding.