Tax treatment of capital contributions between parent and subsidiary

A US parent company (US Co.) owned the entire issued share capital in a UK company (UK Co.). UK Co. owned the entire issued share capital in three UK companies, MG, GBS and CPP. US Co. intended to make a capital contribution to its UK subsidiary, UK Co.  UK Co. would then use that contribution to make capital contributions to GBS and CPP.  The purpose of the capital contribution to UK Co. was to enable it to provide its subsidiaries GBS and CPP with funds to acquire capital assets.

The question was how would the capital contributions be treated for UK tax purposes?

There was a risk that the capital contribution would be treated as a Schedule D Case I receipt (trading receipt) and therefore subject to UK tax. The test to decide whether a capital contribution was a trading receipt was to look at the character of the payment in the recipient’s hands.

In IRC v Falkirk Ice Rink [1975] STC 434 (and the earlier cases of Smart v Lincolnshire Sugar Co Ltd [1937] 20 TC 643 and British Commonwealth International Newsfilm Agency Ltd v Mahany [1962] 40 TC 550) it was held that where a parent company makes a capital contribution to a subsidiary for that payment to be a trading receipt, it would have to be made expressly to compensate the recipient company for trading losses it had incurred, to supplement its trading revenue, as a contribution towards its ongoing trading expenses, or to preserve and maintain trading stability and solvency.  By contrast, where the payment was made by the shareholder in order to provide the company with additional capital the payment was not a trading receipt.

Here the purpose of the capital contributions being made was to fund the acquisition of capital assets, accordingly, they would not be treated as trading receipts.


The capital contributions from US Co. to UK Co. and from UK Co. to GBS and CPP should be described in the records of the donor and any other correspondence between the donor and the recipient as capital contributions to be used for the purpose of acquiring capital assets.

At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.