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The Qualifying Company regime should be retained

Submissions on the Governments proposals for the taxation of QCs and LAQCs closed at the beginning of this week.   We can see no justification for repealing the qualifying company (QC) regime.  The proposed reforms should be confined to loss-attributing qualifying companies (LAQCs).

The transition from QC to partnership status will result in significant compliance and advisor costs for taxpayers managing the transition; unnecessarily bring a large number of companies into a regime that is poorly understood by both taxpayers and Inland Revenue; and result in a windfall tax bonus for QC shareholders with undistributed earnings.

QCs are not presently treated as flow‑through entities for tax purposes.   Under these proposed reforms shareholders in a QC will be taxed on attributed income despite the fact that they have not enjoyed the benefit of any prior losses and that they may have no ability to compel distributions of the income they will now be taxable on.  Minority shareholders who are being taxed on their QC interest are likely to find there is no ready market for their shares and even that their shares are less valuable given their potential to generate unfunded tax liabilities.

QCs are compliance friendly vehicles for holding family businesses and investments .  The efficiencies of the QC regime are largely commercial rather tan tax driven.  There is currently little scope for abuse in the use of QCs.   The requirement for QCs to impute dividends ensures the income derived by the QC is ultimately taxed at the shareholders’ marginal rate.  Restrictions on QC ownership prevent income streaming (it is notable that virtually none of the recent avoidance cases to come through the courts involved the use of QCs).

There is nothing in the Officials’ Issues Paper that would lead the reader to the conclusion that QCs must be abolished.

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