Saturday, Dec 21, 2024

16:48

Reduction or Reorganisation of Share Capital

Posted on: Tuesday, March 25, 2014

If an exam question says “this redemption does not meet the requirements for Chapter 9 Part 6 Taxes Consolidation Act 1997 to apply” what does that really mean?

It means that the redemption will be treated as a distribution to the extent the redemption proceeds exceed the amount or value of the new consideration received by the company.  In other words the payment will be liable to tax under Schedule F and not the more favourable Capital Gains Tax treatment.

From the company’s perspective, the distribution will not be a deductible charge on Income and the company will have to calculate and pay dividend withholding tax to Revenue within fourteen days of the end of the month in which the distribution is made.

If we look at the Chapter 9, Part 6 TCA 1997 it states that a payment made by a company for the acquisition of its own shares will NOT be treated as a Distribution if the following conditions are met:

1. The company purchasing its own shares must be an unquoted trading company or the unquoted holding company of a trading group.

2. Payments made on or after 26th March 1997 by a quoted company on the redemption, repayment or purchase of its own shares will also fall within the new provisions.

3. The redemption, repayment or purchase must be made wholly or mainly for the benefit of the company’s trade or the trade of a 51% subsidiary.

4. The redemption, repayment or purchase must not be part of any scheme, the purpose of which is to enable the owner of the shares to participate in profits without receiving a dividend.

5. The vendor must be resident and ordinarily resident in the state.

6. There must have been a proportionate 25% reduction in the vendor’s interest in (a) the issued share capital and (b) the distributable profits of the company and where appropriate, of the group of which the company forms part.

7. The vendor must not be connected with the company immediately after the purchase.