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Brexit increases likelihood of reform of the Substantial Shareholder Exemption in 2017

In May 2016 the UK government issued a consultation document entitled "Reform of the Substantial Shareholder Exemption". This refers to the corporation tax exemption for UK holding companies selling "substantial shareholdings" in subsidiary companies (whether UK or overseas).

The tax exemption or "SSE" was originally introduced to make it unnecessary for groups to adopt complex offshore structuring solutions, and to enable them to make rational business decisions relating to disposals of group companies, without being deterred by taxation of resulting capital gains.

Unfortunately, the legislation introduced in 2002 is unduly formalistic and complex, no doubt to avoid perceived potential abuses.

Some unsatisfactory aspects of the current legislation include:

1. Requirement for both the investor company and the investee company to maintain a "trading" status.

2. Requirement for both the investor company and the investee company to maintain such trading status immediately after the disposal.

3. Uncertainty around the meaning of trading status, and the concept of what a trading group is.

4. For multinational groups, significant accounting work needs to be done to ensure there is no "substantial non-trading activity" which negates the SSE.

The government decided to consult pre-Brexit on reforming the SSE legislation by making it easier for UK companies to qualify for the tax exemption. Why is this? In short the UK government wishes to make the UK more competitive as a holding company location for international groups. This aspiration and the resulting consultation document were both conceived pre-Brexit. The government will now be likely to be more determined to implement a new, more user-friendly regime, post-Brexit. In particular, the UK government seems keen to address the following perceived problems posed by the SSE in its current form:

  • The SSE is not currently available to groups that have substantial investment assets.
  • The SSE is not available to groups where a non-trading company is being disposed of.
  • Funds that make investments in trading and non-trading companies by intermediate corporate vehicles cannot utilise UK holding companies as an intermediate vehicle because the application of the SSE would be in serious doubt.


1. A Comprehensive Exemption

The possibility of a wide-ranging exemption is one the UK government seems willing to explore. This would mean the SSE would be subject to minimal requirements concerning the nature or activities of the UK company or its investee. It is possible that after "Brexit", the government will give this option more consideration. However, if the comprehensive option were to be taken the following parameters would be put in place:

  • The SSE in comprehensive form would not be available for trading gains. Arguably the current requirement for a minimum holding of 10% of ordinary share capital, held for a 12-month ownership period, already provides the safeguard.
  • The tax exemptions would only apply to gains that result from taxed profits. This seems reasonable enough in the BEPS era, and in any event the current SSE is subject to this requirement.
  • The SSE should not facilitate the tax-free transfer of enveloped passive assets.

2. Investee trading test

This second alternative option would focus on the trading activity of the investee company, and remove the condition that the UK holding company must be a trading company or a member of a trading group. This would be a significant simplification, and enable UK investment companies to make disposals.

3. Investee test other than trading

Another alternative approach is a broader version of option 2 above, so that an investee company would qualify for SSE treatment not only if it is trading, but if it is conducting business activities other than trading. An investment activity that has significant associated management functions would then perhaps qualify for the SSE. Consideration may also be given to prescribing certain activities as qualifying for SSE treatment, which are not currently understood as trading activity.

4. Focus on investor and investee only

This option would involve disapplying the current tests of trading status at group and subgroup levels, focusing only on the investor and the investee companies, and applying qualifying status requirements of a more relaxed nature to the investee company, or both the investor and investee (ignoring other group entities).


The UK government is concerned that sovereign wealth funds, and pension funds cannot, as the SSE is currently framed "drop down" a UK company SPV to own e.g. real estate, infrastructure and private equity companies. This is because the UK company in such a scenario is unlikely to be part of a trading group. Similar worries arise where tax transparent real estate funds own UK intermediate holding companies. The prospect of reform of the SSE to take account of this sector of the economy is exciting.


The UK government stated, pre-Brexit, that it would seek "possible legislation" in the Finance Bill 2017. Post-Brexit, there is a much greater incentive for the government to deliver an attractive legislative SSE package quickly and on time. Coupled with likely further reductions in UK corporation tax, this will almost invariably attract significant international investment. It is worth reminding ourselves that in addition to a current UK corporation tax rate of just 20% (falling to 19% in under a year's time) the UK boasts:

  • The largest network of Double Taxation Conventions in the world (over 100), with OECD-standard non-discrimination articles
  • No dividend withholding tax.
  • A foreign dividend exemption.
  • Proportionate CFC legislation.

Brexit makes more likely a reduction in the UK corporation tax rate to 17%, and perhaps even lower rates, in the foreseeable future. The only possible brake on this are political considerations, as otherwise even a EU member state (which the UK still is) has sovereignty over direct taxation. Even were the UK to have remained in the EU there would have been no offence to EU law, provided any new lower UK corporate tax rates are not "ring- fenced".


There seems little doubt that UK corporation tax reforms will be pro-business in the foreseeable future. Such an agenda receives added force following the Brexit vote on June 30th 2016.

 Martin Palmer

Martin Palmer
T: +44 (0)117 918 1321

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