ACCA Advanced Taxation (ATX) Practice Exam

What defines a 'close company' under tax regulations?

1. A company controlled by more than half of its shareholders

2. A company is controlled by any number of shareholders who are also directors

3. A company controlled by the five largest shareholders

4. A company controlled solely by institutional investors

The correct answer is: A company controlled by the five largest shareholders

A 'close company' under tax regulations is specifically defined as a company that is controlled by a small number of participating shareholders. The correct option indicates that a close company is considered controlled by the five largest shareholders. This definition aligns with the principles set out in tax legislation, which aim to address the taxation implications that arise from the relatively concentrated control of the company by a limited number of individuals, reducing shareholders' reliance on external investors and promoting more personalized management. In essence, the criteria surrounding control are particularly significant, as they can affect tax liabilities and legal obligations. A close company often faces different tax treatments compared with larger, publicly traded companies. This control is particularly relevant for assessing potential tax benefits or liabilities associated with distributions to shareholders or the advantages of private shareholder transactions. It highlights the intention of tax regulations to monitor companies where a small group of individuals can make decisive decisions, impacting tax outcomes. The other options do not align with the established criteria for a close company as articulated in tax legislation. For example, controlling by more than half of the shareholders may include a much larger and less defined group than five significant shareholders, and the involvement of ‘any number’ of shareholders as directors dilutes the focus, as it could involve many individuals rather than establishing