D2.206 The profit distribution test

Corporate tax
Corporate tax | Commentary

D2.206 The profit distribution test

Corporate tax | Commentary

D2.206 The profit distribution test

To be regarded as members of the same group, a parent company must be beneficially entitled to not less than 75% (or 90% in the case of consortium relief involving holding companies of trading subsidiaries, see D2.208) of the profits available for distribution to the equity holders of the subsidiary company. See D2.205 for further details on the definition of a group for group relief purposes.

The percentage of profits so available for distribution to an equity holder (see below) is determined by reference to their beneficial entitlement in the relevant accounting period1 and on the basis that the total profits (see below) of the subsidiary company were fully distributed.

The profit distribution test depends on the rights that attach to shares or securities. The test becomes more complex if these rights are limited or vary, or if there are option rights. See D2.250.

Total profits

'Total profits' for an accounting period means commercial profits, not tax profits.

To arrive at the commercial profits, it is necessary to take the profit figure shown in the profit and loss account, and:


    •     add back any payments made to equity holders as such which have been deducted, and


    •     deducting relevant preference dividends and commercial loan interest

No account is taken of prior year adjustments.

Where there is no commercial profit, the calculation is based on notional profits of £1002.


For the 12 month period to 31 December, A Ltd's accounts for the accounting period show commercial profits of £50,000. Included within

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