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Posted on: Thursday, May 05, 2016


Section 626B TCA 1997 provides that, in certain circumstances, gains from the disposal of shareholdings by ‘parent companies’ are exempt from tax.

There are a number of conditions that must be satisfied by (a) the investor company and (b) the investee company for this exemption to apply.

There are two conditions for the investor company as follows:

1. The investor company is required to have a minimum holding of at least 5%.

What that means is that the parent (investor company) must have been beneficially entitled to not less than:
a) 5% of the investee company’s ordinary share capital
b) 5% of the profits available for distribution to equity shareholders of the investee company
c) 5% of the assets available for distribution on a winding-up of the investee company.

2. The investor company must have the minimum holding in the investee company for a continuous period of at least twelve months in the two years prior to the disposal.

Conditions for the investee company are as follows:

1. The investee company must carry on a trade or trades or
2. The business of the investor company and the investee company, taken together, must consist “wholly or mainly” of carrying on a trade or trades.

The term ‘wholly or mainly’ means greater than 50%.  According to Revenue Tax Briefing 66 the primary tests which should be used to gauge whether the "wholly or mainly" test is met are (a) the proportion of net trading profits and (b) the proportion of net trading assets.  It is also possible to include (c) trading turnover as a proportion of gross receipts and (d) the proportion of time employees spend carrying out trading and non-trading activities. 

3. At the time of the disposal, the investee company must be resident in an EU Member State or a country with which Ireland has a tax treaty.

Important Points to bear in mind:

• Participation Exemption automatically applies if the conditions for the relief are satisfied.
• If a parent company incurs a loss and the conditions for the PE are met, then no relief is available for the loss bearing in mind that had a gain arisen instead, it would not have been taxable.
• Participation does not apply where the shares in the investee company derive the greater part of their value from (a) a life insurance business or life fund or (b) land situated in the state or from (c) minerals, or (d) rights or interests in relation to mining or minerals or (e) the searching of minerals in Ireland or (f) exploration and exploration rights of the sea bed and subsoil.

It is, therefore, essential to review the financial statements of the investee company to ascertain if more than 50% of the company’s value is derived from (a) to (f) above.

If the investor company is only selling part of its shareholding in the investee company, Participation Exemption may be available providing the relevant conditions are satisfied.

In summary 
Irish holding companies (i.e. the Investor Company) can benefit from a full exemption from Irish Capital Gains Tax in respect of gains arising on the disposal of shares in certain subsidiary companies (i.e. the Investee Company) providing four tests are met:
1. The Shareholding Test
2. The Trading Test
3. The Assets Test and
4. The Jurisdictional Test



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