Commentary

D1.1032 Substantial shareholding exemption—Meaning of trading company

Corporate tax
Corporate tax | Commentary

D1.1032 Substantial shareholding exemption—Meaning of trading company

Corporate tax | Commentary

D1.1032 Substantial shareholding exemption—Meaning of trading company

The term trading company is used for the purpose of defining the requirements to be met by the target company (see D1.1031) (and the investing company for disposals before 1 April 2017 see D1.1071)) for the substantial shareholding exemption (SSE) to apply.

A trading company is defined as one carrying on trading activities1.

Non-trading activities are permitted provided they do not represent a 'substantial' part of the company's total activities2. The word substantial is not defined for these purposes. Note that the fact that the substantial shareholding requirement defines a substantial shareholding as being a holding of not less than 10%, this is without prejudice to what is meant by substantial where the word appears in other contexts in the SSE legislation3. HMRC have stated that substantial in this context is taken to mean more than 20% and the comparison is made of gross amounts. HMRC consider the proportion of non-trading turnover, assets, expenses or time incurred by officers on non-trading activities4, as well as the company's history.

The guidance goes on to acknowledge that some indicators may point in one direction and others the opposite way. The impact of each of the different indicators needs to be considered in the context of the individual facts and circumstances of the case in point, with different weightings applying accordingly. The test is therefore highly subjective.

Turnover is thus the measure for the profit and loss account aspect of the test — not the amounts of profit, be

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