Special shares not to be treated as loan

A change in the funding structure of an Australian subsidiary company involved the replace­ment by special shares in a newly incorporated “in-between” company of the loans which the shareholders had originally made available to the company. The newly issued shares entitled their holders to an annual compound payment in the initial amount of 8% accumulating to a maximum of 12%. The shares were issued and procured at face value, had preference over the regular shares in the company’s capital and were redeemable at any time within a term of up to ten years, and in the parent company’s financial statements were accounted for as a long-term claim vis-à-vis the subsidiary. The corporation tax return accounted for the pay-out on the shares as dividends enjoying exemption under the holding exemption regime.

The question presented itself as to whether the replacement of a shareholder loan by special shares such as those involved in this particular scenario could be regarded as being at odds with the object and purport of prevailing legislation, this being the argument presented by the Tax and Customs Administration, keen as it was to tax the pay-out on the shares. According to the Supreme Court, however, it was up to the shareholders to decide how a particular hold­ing had best be financed: their choice in favour of capital provision over a loan did not involve any breach of the object and purport of the law. The Amsterdam Court of Appeal at an earlier stage in the proceedings having ruled that the special shares in a civil law sense qualified as shares as they were largely similar to cumulative preference shares, the Supreme Court duly went on to uphold the Court of Appeal’s conclusion.