How does section 371QE calculate indirect shareholdings in a CFC?

Section 371QE uses the formula P × S. P is the product of the appropriate fractional shareholdings at each intermediate level in the chain, excluding the company that directly holds CFC shares. S is the percentage of the CFC's issued ordinary shares held directly by the bottom company. The result gives the indirect percentage interest.

What is the 'appropriate fraction' in the P × S formula under section 371QE?

The appropriate fraction for any person at a given level in the chain is the fraction of issued ordinary shares they hold in the next company down the chain. For example, if company B owns 90% of company C, the appropriate fraction for B is 0.90. These fractions are multiplied together to calculate P.

How are multiple chains of indirect CFC ownership handled under section 371QE?

Where a relevant person holds indirect interests through more than one chain of companies, the P × S formula is applied separately to each chain. The results from each individual chain are then added together to arrive at the total percentage of the CFC's issued ordinary shares represented by the person's indirect interest.

Can you give an example of the P × S calculation for indirect CFC shareholdings?

If person A owns 80% of company B, B owns 90% of company C, and C holds 90% of CFC shares, then P equals 0.80 × 0.90 (excluding C) which is 0.72. S is 90%. A's indirect interest is 0.72 × 90% = 64.8%. Additional chains are calculated separately and summed.

Taxation (International and Other Provisions) Act 2010 section 371QE

Indirect shareholdings

Section 371QE explains how to calculate the percentage of a controlled foreign company's (CFC's) issued ordinary shares that a relevant person holds indirectly, through one or more chains of intermediate companies.

Where a person holds shares in a CFC indirectly through a chain of companies, the percentage interest is calculated by multiplying together the fractional shareholdings at each level in the chain (excluding the company that directly holds the CFC shares), and then multiplying by the percentage of CFC shares held at the bottom of the chain.
The formula used is P × S, where P is the product of the appropriate fractions at each intermediate level (excluding the company directly holding the CFC shares), and S is the percentage of the CFC's issued ordinary shares held directly at the end of the chain.
The "appropriate fraction" for any person at a given level is simply the fraction of issued ordinary shares they hold in the next company down the chain.
Where the relevant person has more than one indirect route to holding CFC shares (for example, through different chains of companies), the P × S formula is applied separately to each chain, and the results are then added together to give the total indirect percentage interest.

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