Friday, 27 January 2017

United Kingdom: Draft legislation released on reform to substantial shareholder exemption

On 5 December 2016, the UK government released draft legislation aimed at reforming the substantial shareholding exemption (SSE) to make it simpler, more coherent and more internationally competitive.
The proposed changes to the SSE legislation are as follows:

  • The requirement that the corporate shareholder (the investing company) be a trading company or a member of a trading group would be removed.
  • The company being sold (the investee company) still would have to be a trading company or holding company of a trading group. The only change to the investee company test would be the removal of the post-disposal trading requirement for disposals to non-connected parties. This change would eliminate uncertainty as to whether any post-disposal restructuring undertaken by the purchaser could affect a vendor’s ability to claim the SSE.
  • The substantial shareholding test would be extended from 12 months in the two years prior to disposal, to 12 months in the previous six years.
  • There would be a broader exemption for qualifying institutional investors that would apply to the disposal of shares held by a UK company owned by institutional investors, such as pension schemes, investment trusts, persons that have sovereign immunity and charities (but not REITs). The “company invested in” test would be removed and the substantial shareholding could be met if the investing company’s shareholding is less than 10%, but the cost of acquisition of that shareholding was at least GBP 50 million. If 80% or more of the ordinary share capital of the investing company is held directly or indirectly by qualifying institutional investors, the gains and losses arising from the disposal of a substantial shareholding by the investing company would qualify for full exemption; there would be a partial exemption, representing the interests of the qualifying institutional investors, where their interest is 25% or more, but less than 80%. Ordinary share capital could not be owned through a body corporate that is not a qualifying institutional investor and that has any of its ordinary share capital listed on a recognized stock exchange.  

Source: Deloitte