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Stage 3 Module 10 Reorganisations, Liquidations and Sale of a Business

Chartered TaxConsultant

Paul Dillon Chartered Accountants House

Learning Objectives• Chargeable gains, stamp duty and other tax

issues arising on intra group transfers of businesses and assets.

• Tax reliefs which apply to corporate reorganisations, mergers and demergers.

• Tax issues arising on the winding up of companies.

• Tax aspects of sales of assets and shares.

Friday Afternoon

• Intra Group Transfers• CGT Groups• Stamp Duty Groups• Share Capital Reorganisations• Reorganisations

Saturday

• Partition of Family Trading Company• Buy Back of Shares (in text book under M6)• Share Valuations• Liquidations• Buying and Selling a Business

Intra Group Transfers

Intra Group Transfers• Main tax heads

– CGT– Stamp Duty

• Other Taxes– CT– VAT

• Tax Reliefs; obligations and clawbacks

CGT Groups• Sec 617 TCA 1997• Group Relief• “No gain/No loss” on disposal on intra group

transfers of chargeable assets• Qualifying groups• CT on chargeable gains and CGT on

development land

CGT Group• Sec 616(1)(bb) TCA 1997• Principal company and all effective 75% subs• Company – Sec 616(1)(a) TCA 1997

– Tax resident in EU or in EEA country having DTA with Ireland

• Principal Company – Sec 616(1)(c) TCA 1997– A parent of a 75% subsidiary

Effective 75% Subsidiary• Sec 616(1)(b) TCA 1997• 75% ownership and entitlement tests

– ≥ 75% ordinary share capital (direct or indirect)– ≥ 75% distributable profits – ≥ 75% distributable assets on liquidation

• CGT Group – Principal company and its effective 75% subs and their effective 75% subs

• Includes companies <75% owned by principal co

• Contrast with CT Groups

CGT GroupsA

G

E

CB

D

F

80% 90%

80% 75%

40% 80%

CGT GroupsA

D

B

C

90%

60%

90%

25%

A,B,C and D are a CGT Group

Intra Group Transfers• Sec 547 TCA 1997

– MV applies where bargain not at arm’s length• Sec 549 TCA 1997

– Connected persons within Sec 547• Sec 10(6) TCA 1997

– Control test – connected companies– Same person has control of both companies– Person controls one company and connected

persons or he together with connected persons control the other company


• CGT event on transfer of chargeable assets• From one group company to another• MV applies• Sec 617 TCA Relief may apply

CGT Group Relief • Sec 617 TCA 1997• No CGT on transfers between group

members– Transaction is between group members– Co transferring asset is resident in the

State or asset is a chargeable asset immediately before the transfer

– Co acquiring asset is resident in the State or the asset is a chargeable asset immediately after the transfer

Cont. CGT Group Relief• Non resident companies – Irish branch

assets• Non resident company liable to CGT• Sec 649(2) TCA 97 • Development land gains within Sec 617

group relief

EU and EEA• EU and EEA companies can be part of CGT

group• CGT group relief for chargeable assets only• Transfer and transferee within CGT charge• Sec 617 relief for non residents

– EU/EEA resident– Holding branch assets in Ireland

EU and EEA• Revenue concession

– Worldwide group– Transfer of trade carried on in the State– Profits and gains liable to corporation tax– Assets in use for trade – no discontinuance– Bona Fide commercial reasons – Submission to Revenue– Formal undertakings from transferee and

group parent• EU fundamental freedoms?

CGT Groups• Sec 617 TCA 1997• Transfers deemed to at “no gain/no loss”• Acquiring company takes base cost and

acquisition date of transferor• No crytallisation of gain at time of intra-group

transfer• Realised losses cannot be transferred to group

members• Asset with gain could be transferred into group

company with loss prior to sale

CGT Groups• Group relief applies automatically• Takes precedence over other reliefs (not

S291A)• Example:• Sec 626B TCA 1997 –CGT exemption for sale

by parent of shares in a subsidiary• Group relief applies to:

– CT on chargeable gains– CGT on development land gains

Trading Stock• CGT Group Relief does not apply to trading

stock• Sec 618 TCA 1997 applies Sec 596 TCA 1997• Capital asset held as trading stock of one

group company• Transferred to another group company where

it is held as trading stock• Vice versa

Sec 596 ReliefCapital Asset becomes Trading Stock of transferee

Trading Stock becomes Capital Asset of transferee

•Deemed disposal @ mv•CGT gain/loss arises•CGT group relief applies•Sec 617 TCA 1997•Election by transferee to reduce MV trading stock by amount of capital gain•No election if a loss arises

•Transferor treated as transferring a capital asset•CGT Group relief available•Transferee deemed to acquire asset for same cost and at same date of acquisition by transferor

•Review Intra Group gains of trading stock•12.5% CT on profits? CT on chargeable gain?

Clawback of Relief• Potential Clawback of CGT Group Relief

– When asset sold outside the CGT group– When the co with the asset leaves the group– Where the asset ceased to be a chargeable

asset

Sale of Asset outside Group• Sec 619(2) TCA 1997• Original cost and acquisition date of member

group acquiring asset• All group members deemed to be the same

person• Sec 619(1) TCA 1997 – application of Sec 555• No reduction for capital allowances where gain

arises• Loss restricted by capital allowances claimed

by other group company

Co Leaving Group• Sec 623(2) TCA 1997• Deemed disposal where co leaves CGT

group within 10 years of acquiring asset• Sec 623(4) TCA 1997• Departing company:

– Deemed to have sold and immediately reacquired asset

– At date asset was acquired from other group co

Co Leaving Group• Sec 623(1) TCA 1997• Clawback provisions do not apply where bona

fide liquidation• Sec 623(3)

– Two or more associated companies – Cease to be members of group at same time– No clawback on assets transferred between

them– Where relief under Sec 617 previously

claimed

Asset Ceases to be Chargeable• Sec 620A TCA 1997• Co resident in EU/EEA country acquires asset• Group Relief provisions apply• Asset becomes situated outside the State• Co deemed to be sold and immediately

reacquired

Stamp Duty Reliefs• SD payable on actual consideration given• Exception = gift or voluntary disposition @ MV• Potential Stamp Duty @ 6% for intra group

transfers• Sec 79 SDCA 1999 – associated companies

relief• SD on intra group transactions eliminated

Associated Companies Relief• Sec 79 SDCA 1999

90%

• 90% beneficial ownership – direct and indirect• 90% entitlement to profits on distribution• 90% entitlement to assets on winding up

90%

Associated Companies• Beneficial v Legal ownership• Appointment of liquidator• Company ceases to be beneficial owner• Company holds legal title• Sec 79 SDCA 1999 - beneficial ownership• 90% profit and asset tests similar to CT loss

groups• Non Irish resident and registered companies

can qualify

Associated Companies

• Revenue Notes for Guidance - body corporate with share capital

• Adjudication by Revenue - Sec 20 SDCA 1999

• Statutory declaration confirming conditions met

Example

MIAMI

SeattleBostonToronto

SDLBSLTRL

90% 100%

90%100% 90% Associated

90%

Anti Avoidance• Sec 79(5) SDCA 1999• Any part of consideration provided by person

other than a company associated with transferor or transferee

• Bank borrowings excluded if commercial• Beneficial ownership previously transferred by

a non-associated person eg subsale• 90% association is to cease- arrangement at

time of execution of instrument

Anti Avoidance• Sec 79(7) SDCA 1999 – claw back provision• Two companies cease to be 90% associated• Within two years of transfer• Bona fide liquidations not excluded from

claw back – unlike CGT groups• Possible Revenue concession for group

reorganisations

Stamp Duty

• Where Sec 79 SDCA 1999 relief does not apply

• Review proposed transaction• Can plant be transferred by delivery?• Can debtors be retained – collection agent?


• Withholding Tax• Corporation Tax• VAT

Withholding Tax• Sec 980 TCA 1997 • Withholding tax applies @ 15%• Even where CGT group relief available• Consideration > €500,000• Irish land, minerals or exploration rights• Shares in non listed companies deriving

value from above assets• Goodwill of Irish trade• CG 50 clearance

Corporation Tax• Sec 400 TCA 1997• Election for trade to continue• 75% common ownership• Losses forward claimed• Assets tranferred @ tax wdv• Sec 401 loss buying rules – major change in

ownership or activities or dormant trade• Sec 312 TCA 97 – no IBA claw back on

election

VAT• Sec 20(2)(c) VATCA 2010• Assets transferred between group

companies• Transferee must be an accountable person

– VAT registered• Transfer constitutes undertaking or part of

undertaking capable of being operated on an independent basis

Reorganisations

Share Capital Reorganisations• Pre-sale structuring plan• Introduction of new investors• CGT for shareholders• Reliefs covered in Stage 2, Module 5 Section

4.14• Refresher – some examples

“Paper for Paper”• Sec 584 TCA 1997• Shares exchanged for other shares in same

company• Shares allotted in proportion to existing

shares• Sec 584(3) TCA 1997• Reorganisation or reduction of share capital• No disposal of original shareholding• New shares take original cost and acquisition

date of old shares for future CGT

Example• Adam purchased 5,000 ord shares in S Ltd • Cost €10,000• Date 10th January 1992• Reorganisation of share capital in April 2002• Adam received 2,000 new shares in exchange

for his 5,000 ord shares• 2,000 new shares sold in Dec 2011 for

€60,000

CGT ComputationDate of disposal 10th December 2011Sale Proceeds €60,000Cost

January 19925,000 of shares €10,000*Indexation (91/92) 1.406Indexed Cost €14,060Gain €45,940

*no disposal of original shares in April 2002

Exchange of Shares• Original shares plus consideration• New shares take on original cost of old shares• New consideration treated as enhancement

expenditure

Example1/5/1986: 1,000 Ord Shares bought

Cost €6,000June 1997: Reorganisation of company

2,000 new shares received in exchange for original shares plus

payment by shareholder of €1,000

30/11/2011: 2,000 shares sold for €100,000

CGT 2011Sale Proceeds €100,000Cost 1/5/1986 €6,000

Indexation 1.637 (€9,822)Enhancement ExpJune 1997 €1,000Indexed 1.232 (€1,232)

Gain €88,946

Exchange of Shares• Exchange of old shares for New Shares plus

consideration • Deemed part disposal of old shares• Cash or value of assets received by

shareholder• New shares have base cost of old shares

minus the part allocated to part disposal

ExampleJuly 1996M bought 4,000 shares acquired in M LtdCost €5,000 in July 2006

CGT July 2000 – Part disposalSale Proceeds €4,000Cost€5,000 x €4,000 = €1,429 €14,000Indexation 1.251 €1,788Gain €2,212

July 2000M received €4,000 plus 3,000 new shares in M Ltd as part of reorganisationMV 3,000 shares in July 2000 = €10,000August 2011 M sold 3,000 shares for €42,000

CGT August 2011Sale Proceeds €42,000CostOriginal €5,000Used €1,429 €3,571 x 1.251 €4,467Gain €37,533

Group Reorganisations• Why do corporate groups restructure?• Reduction of number of companies in group• Lower compliance costs – audit, tax,

company secretarial• Pre-sale restructuring plan for tax efficient

sale• Introduction of new investors• Management buy-in

Reorganisations

• Corporate restructuring• Transfer of businesses, assets or shares• To acquiring company• Acquiring company issues shares in itself to

transferor company or its shareholders

Corporate RestructuringCommon Types Potential Tax

• Share for Share Swap• Share for Undertaking

three party swap• Share for Undertaking

two party swap

• Tax on gains for company on transfer of shares , assets or business

• CGT for shareholders on shares swapped or sold

• Stamp Duty for company acquisition of shares, business or assets

• CT for companies for CA assets transferred

• VAT on transfers of assets

Share for Share Swap

S/H A

Co A

S/H B S/H A S/H B

Co B

Co A

Co B

Share for Undertaking 3 Party Swap

S/H A

Co A

S/H B S/H A S/H B

Co BCo B

Business

Co A Business

Share for Undertaking 2 Party Swap

S/H A

Co A

S/H B

Co B

Business

Co B

A

S/H Co B

Co A business

Co A

CGT Reliefs & Stamp Duty ReliefsReconstruction• No definition in tax law Case Law Brooklands

Selangor Holdings Ltd v IRC• Basic character remains unchanged• Same persons as members• No fundamental difference after reconstruction• Shareholder dispute – reorganisation of share capital• Streaming = partition/division• TB 48• Substantially the same business carried on by

substantially the same persons

CGT Reliefs & Stamp Duty ReliefsUndertaking• No statutory definition• UK case law “Business or enterprise undertaken by

a company”• Business has a wider concept than trade• Activity may be intermittent• TB 48 – segregation of business and not merely of

assets• Capable of being carried out in its own right• No of employees being transferred

CGT Reliefs & Stamp Duty ReliefsAmalgamation• Not defined in legislation• Re South African Supply & Cold Storage Co Ltd• Rolling of two concerns into one/merged

undertakings - TB 48 • Not merely the continuance of one concern• Not necessary to have a new company• Shareholders substantially remaining

unchanged• Joining together of two or more companies

Share for Share Exchange• Sec 568 TCA 1997• Company issues shares to a person in

exchange for their shares in another company• Acquiring company has control of target

company or• General offer made to member of target

company which if satisfied will give control to acquiring company

• Bona Fide commercial reasons• No scheme with main purpose of tax avoidance• No disposal or acquisition for CGT

Share for Share: Stamp Duty Relief• Sec 80 SDCA 1999• Reconstructions and amalgamations for share

for share swaps• Transfer of shares in target company to

acquiring company• Clawback of relief if beneficial ownership of

shares in target company not held for 2 years• Interest @.0219% per day from date

beneficial ownership ceases• Interest from date of transaction if false

information

Share for Share: Stamp Duty Relief• Bona Fide Commercial reasons • Acquiring co must acquire 90% of target co in single

transaction• Consideration = 90% in new shares in acquiring co• Shares must be issued in proportion to shareholdings

in target co• Acquiring co must be limited and Irish/EU resident• Target co can be unlimited and resident anywhere• Acquiring co must increase share capital for takeover• Adjudication by Revenue • Statutory declaration from company or solicitor

Share for Undertaking 3 Party• Target transfers all or part if business• To acquiring company• In exchange for shares in acquiring company• Shares issued to shareholders of target

company• Undertaking will be owned by the acquiring

company• Acquiring company owned by original

shareholder plus target company shareholder

Potential Taxes• CGT – target company on disposal of

undertaking• CGT – shareholders of target company –

value passing out of shares• SD – up to 6% on acquiring company• CT cessation issues and balancing charges• VAT on transfer of undertaking

CGT Relief Company Level• Sec 615 TCA 1997• Transfer of business at no gain/no loss• Target company gets no consideration other

than acquiring company taking over liabilities• Companies must be Irish or EU resident• Assets transferred must be chargeable assets• No relief for development land• Sec 633 TCA 1997 – extends relief for

development land under scheme of reconstruction or amalgamation

CGT Relief Company Level• Partitions do not qualify for Sec 615 TCA 1997 relief

• Concessional relief for “family partitions”• Substantial Identity of ownership• Before and after reconstruction – TB 48• Immediately after the reconstruction• No contract for sale should exist prior to

reorganisation• Revenue pre clearance provided• No clawback provisions

CGT Relief - Shareholders• Sec 587 TCA 1997• Acquiring co issues shares to shareholders

of target company• In proportion to original shareholdings• Original shares must be retained or

cancelled• No CGT disposal triggered • New shares take on cost of original shares

Transfer of Business• Sec 130 TCA 1997 • Transfer of business is a distribution• TB 48 – where Sec 587 and 615 TCA 1997

apply• Bona fide reconstructions• Revenue practice is not to invoke Sec 130

TCA 1997

Share for Undertaking 3 Party: SD Relief• Sec 80 SDCA 1999 • Substantial SD savings – up to 6%• Bona fide reconstruction

– Assets must be an undertaking or part of undertaking

– 90% of consideration are shares in acquiring co

– Substantial continuity of ownership in acquiring co

– No minimum holding period for shares– Clawback if relief granted on false information

Share for Undertaking 2 Party• Company transfers all or part of its business

to another company• In exchange for shares in that company• After the swap, shareholders of target own

shares in acquiring company• Acquiring company carries on previous

business of target company

Share for Undertaking 2 Party• CGT Relief for Target Company• Sec 631 TCA 1997• Deferral of CGT on transfers of a trading

operation between EU resident members– All or part of trade carried on in Ireland

transferred to another company– Consideration is the issue of shares in

acquiring company to target company– Company incorporated, tax resident and

liable to CT in EU State

Question Derry plc is considering purchasing Casey Ltd which has a modern factory facility where production could be expanded to provide much needed capacity to Derry plc. The approximate total value of the shares in the company is €3.5 million. The underlying market value of the business is as follows:• Factory €2,500,000• Goodwill €1,000,000Derry plc is in discussions with the owner of Casey Ltd, Pat Casey, on how to structure the purchase. In particular, they have discussed the option of Derry plc issuing shares to Pat Casey in exchange for the undertaking of Casey Ltd.

Question

Requirement

What are the implications of this option for Derry plc and Pat Casey?

Derry plc: shares for undertaking

• The issue of shares in Derry plc to Pat Casey in exchange for the undertaking of Casey Ltd will result in the transfer of Casey Ltd’s factory and business to Derry plc.

• If the conditions of section 80 SDCA 1999 are satisfied, Derry plc will avoid a stamp duty liability on the purchase of the factory and business.

• Derry plc is acquiring the assets of Casey Ltd, and will avoid the risk of assuming the history of Casey Ltd as a company.

• Under section 615 TCA 1997, Derry plc will take on the original base cost of the assets of Casey Ltd as the exchange will be deemed to be carried out for no gain/no loss.

Casey Ltd & Pat: Shares for undertaking• Issue of shares in Derry plc to Pat Casey in exchange for

the undertaking of Casey Ltd results in the transfer of Casey Ltd’s factory and business to Derry Ltd.

• CGT relief under section 615 TCA 1997 can be claimed by Casey Ltd on the transfer of its assets to Derry plc which results in the transfer taking place for no gain/no loss.

• If the conditions of section 587 TCA 1997 are satisfied, then Pat avoids upfront CGT liability on the effective disposal of his shares in Casey Ltd and the new holding in Derry plc will be treated as if it were the original holding in Casey Ltd

• However, Pat must sell his shares in Derry plc to access the wealth attributable to his Casey Ltd shares.

CGT Relief – 2 Party • Immediately after the transfer

– Assets transferred must be used in trade of acquiring co

– Carried on in Ireland– Acquiring co must be chargeable to CT or CGT after

transfer– Acquiring co cannot be exempt from CT or CGT

under DTA• Clawback if shares sold within 6 yrs by target co• Base cost of shares reduced by deferred gain• Sec 308A TCA 97 – no BC on trade assets in

merger

Stamp Duty Relief-2 Party • Acquiring company• Sec 80 SDCA 1999 – same rules as for 3

party swap• Consideration shares issued to target

company• Clawback if target company ceases within 2

years• No clawback if beneficial ownership lost due

to reconstruction, amalgamation or liquidation

Partition of Family Trading Co• Demergers can qualify for the

reconstruction reliefs• Business carried on in two companies after

demerger• Shareholders interests remain the same• Reliefs do not apply where businesses

divided into individual ownership• Revenue concession for family partitions

Partition of Family Trading Co• Family trading company or group• Broken into individual trading companies• No CGT will apply – Sec 587 and 615 TCA • Value of each individual holding• Remains strictly unaltered after partition• Other conditions to be met• Tax Briefing 44• Reorganisation of shares into separate classes• Deriving value from separate trades• New companies formed to take over trades

Partition of Family Trading CoNo money or money’s worth All parties Irish resident

No value shifting Trading companies only

Parties accept original CGT costapplies

Trades capable of divisionNon trade assets < 10%

Shareholders accept originalCGT cost applies

Separated trades must continue

Family partition only Groups – 100% sub of family coSec 623 TCA 97 applies

100% Family companies Bona fide – no tax avoidance

Partition of Family Trading Co• Advance approval from Revenue must be

sought• Concession does not apply to Stamp Duty• Significant cost for family restructuring with

partitions

Other Taxes• PAYE • Revenue concession• No Forms P45• Advance Clearance• VAT, CT and CGT withholding

Employment Law• EU “TUPE” Regulations 2003• Protection of Employees on Transfer of

Undertakings• Intra-Group or internal reorganisation• Rights and obligations under employment

contract transfers to new employer• Employees must be given (within 30 days):

– Date of transfer– Reason for transfer– Legal, social and economic implications for

employee– Measures envisaged for employees

Share Buy Back

Share Buy Back

• S.130 TCA 1997 – distribution rules• Individual charged under Sch F to Income

Tax, PRSI and USC• S.176(1) TCA – anti avoidance to avoid Sch F• Chapter 9, Part 6 TCA 1997 • CGT treatment if conditions met

Share Buy Back• Vendor resident and ord resident in Ireland• Owned shares for at least 5 years• Inherited shares/approved share scheme –

3 years• Trading company – wholly or mainly• Sufficient reserves under Company Law

Share Buy Back• Not part of scheme or arrangement to

participate in profits• Sec 182 TCA 97 – disclosure to Revenue• Submit within 9 months of AP• Sec 176(6)(1)(b) TCA 97 – conditions

relaxed where Inheritance Tax discharged and hardship

Trade Benefit Test• Sec 176(1)(a)(i)(I) TCA 97• Wholly or mainly to benefit trade• Company or 51% subsidiary• Subjective test – TB 25

– Shareholder disagreement– Equity finance from outside shareholder– Retiring shareholder/director– Personal rep of decd shareholder– Legatee does not want shares

Trade Benefit Test• Adverse effect on company unless dissenting

shareholder removed• Sale of entire shareholding • Sever all connection with company• Advance Revenue agreement• Revenue Guidelines – exceptions

– Retiring director retaining small shareholding– Controlling director in family company

passing shares to children but remaining as director

Substantially Reduced• Shareholder’s interest must be substantially

reduced• Reduce shareholding by at least 25%• Include associated persons

– Spouses, parents, minor children– Company controlled and under common

control– Trustees – Personal Reps– Persons acting on instructions of another

Substantially Reduced Example• Multichem Ltd has issued share capital of 5,000 €1

shares, of which 1,000 are owned by Conor Maguire & 250 by his wife Mrs Maguire.

• If Multichem Ltd purchases 250 shares from each of them, Mrs Maguire will own no shares after the purchase and test to determine the reduction in Conor’s interest will ignore Mrs Maguire’s former holding.

• Before the purchase, Conor’s interest = 20% (1,000/5,000) and, after the purchase, = 16.67% (750/4,500), < requisite 25% i.e. Conor’s interest should be reduced to 15%.

Substantially Reduced Example• The 25% reduction test in respect of Mrs Maguire’s

interest must include Conor’s holding because he still owns shares after the transaction.

• Mrs Maguire’s interest (including that of her associate) is reduced from 25% (1,250/5,000) to 16.67% (750/4,500) = reduction of more than 25%

• Therefore Conor has not reduced his interest in Multichem Ltd by 25% but Mrs Maguire has

Substantially Reduced Example• Alternatively, Multichem should purchase 500

shares from Conor and none from Mrs Maguire. • The test to determine the reduction in Conor’s

interest will include Mrs Maguire’s holding because she still owns shares after the transaction. His interest is reduced from 25% (1,250/5,000) to 16.67% (750/4,500), which is a reduction of more than 25%.

Substantially Reduced• Sec 184 TCA 97 – treasury shares deemed

cancelled• Vendor’s post sale % based on reduced

issued share capital• >25% of shares to be sold• Revenue require disposal of virtually all

shares• Shares held by associates combined

Profit Reduction Test• Vendor must satisfy 25% Profit Reduction Test• Beneficial entitlement to distributable profit

redued to 75% or less of pre sale amount• Applies where company acquiring shares is

group member• Vendor owns shares in group company after

sale• Vendor owns shares in acquiring co and in

other group co prior to sale

Groups• Sec 179 TCA 97• Group companies• Holding companies and 51% subsidiaries• Vendor and associate interests reduction

25% shares and distributable profits• Buyback not part of scheme or arrangement

for vendor or associate having interest that would break conditions

Vendor Connected with Co• Vendor cannot be connected with company or

group co after sale• Sec 186 TCA 97 – person connected if

– He controls the company– Has or is entitled to acquire directly or

indirectly >30% of• issued ord shares of co• loan and issued share capital of co• voting power in company• assets of co on windup (equity share)

Claiming Buy Back Relief• Form AOS 1• Submit at same time as CT1 for AP in which

payment is made• Sec 980 TCA 97• Shares deriving greater part of value from

specified asset• Consideration > €500,000• 15% withholding tax• CG 50 clearance procedures

Tax Planning and Buy Backs

• Buy back and retirement relief• Limit of €750,000• Gift shares to children first• Sale to company of shares worth €750,000• Termination payment and pension contribution• BPR for family members receiving shares?• Crucial that CGT treatment on buy back

applies

SD and Share Buy Back• SD @1% if transfer is executed by stock

transfer form or other instrument• No SD if:

– Agreement of contract for sale– Hand over of share certificate– No declaration of trust

• Deeming provisions of Sec 31(1)(b) SDCA 1999 do not apply to contract/agreement for sale of shares

Example – Buy Back and other reliefs• Darren Philips is a 60% shareholder & director in Philips Trading Ltd.

He is 70 years of age. He has two sons working in the company who each hold a 20% shareholding.

• Philips Trading has distributable reserves of €1 million. • Darren’s 60% shareholding is valued at approximately €700,000. • Darren decides to retire and let his sons take over as they are

coming up with the best management and strategy ideas for the business.

• The company undertakes a scheme of share buy-back whereby all but 1% of Darren’s shares are redeemed for a payment of €700,000. Pre-clearance is secured from Revenue which confirms that the buy-back satisfies the trade benefit test and the distribution will qualify for CGT treatment instead of an income tax treatment. Darren has substantially reduced his shareholding and is allowed to retain the 1% shareholding for sentimental reasons.

Example – Buy Back and other reliefsDarren also retires as a working director and takes a tax exempt termination payment of €100,000 The company also pays €200,000 into his pension scheme. In total therefore, Darren received the following tax exemption payments from the company:

Distribution under section 176 €700,000*Ex-gratia termination payment €100,000Pension contribution €200,000Total €1,000,000

*Distribution is taxable as capital receipt under section 176 and therefore qualifies as a disposal for retirement relief purposes. He may also qualify for retirement relief under section 598 TCA 1997 (Module 6).

Share Valuations

Share Valuations

• Open Market Value – sec 548(4) TCA 1997• Willing buyer and purchaser• Purchaser has access to all information• Most common methods

– Dividend Yield– Earnings– Net Assets

Dividend Yield• Minority shareholdings• < 25%• Amount and timing of dividend payments • Significant part of return• Shareholder not in a position to exercise

control• Methodology – historic dividends paid• Current dividends position – maintained?

Earnings• More substantial shareholdings• Maintainable earnings • Capitalised using P/E Ratio• Pattern of past earnings• Weighted average of past 3/5 years• P/E of comparable quoted company• Discount P/E for lack of market

Net Assets• Balance Sheet Value• Adjust for market values of fixed assets• Consider intangibles not on balance sheet• Consider if little or no relationship to level of

earnings• Hybrid method may be appropriate

Liquidations

Liquidations• Liquidations more common now• Cash extraction method following sale of

business or assets• Appointment of liquidator• Tax issues for liquidator and shareholders• Various reliefs – clawback can be triggered

on liquidation

Appointment of Liquidator• Three types of liquidations1. Creditors voluntary – initiated by company2. Court liquidation – initiated by company, creditor

(Revenue) or shareholder3. Members’ Voluntary Liquidation – group

rationalisations, extraction of assets• Appointment of liquidator – tax consequences• CT, CGT, SD and VAT

Corporation Tax• Cessation of AP• Commencement of AP• Terminal Loss Relief for group• Restriction on distributions – close company

surcharge implications• Deductibility of termination payments to

employees

SummaryAPs Losses Close Co SurchargeS. 27(7) TCA 1997

Appointment of liquidator

Filing and payment due dates

Post cessation income

S. 397 TCA 1997

TLR on cessation of trade

S. 410 TCA 1997

Co ceases to be member of group

No group relief for losses post appointment of liquidator

Distribution made in course of liquidation

Cannot be used to reduce close co surcharge

Capital dividends in course of winding up

Termination Payments• Payments in excess of Statutory Redundancy• Has employee a contractual right to payment?• If payment is ex gratia and employee has no

contractual right to receive the payment no tax deduction if payment made after cessation of trade

• S. 109(2) TCA 1997 – tax deduction for statutory redundancy payments

• Includes amounts paid in post cessation period

Stamp Duty• No SD on appointment of liquidator• Implications for reliefs claimed

– S.80 SDCA relief on share for share undertaking two party swap

– Clawback of relief if relationship broken within two years - exception for liquidation

• S.79 SCDA 1999 relief– Clawback if relationship ceased within 2

years• No exemption on liquidation• Revenue Guidance Notes

Capital Gains Tax• Company ceases to be beneficial owner of

asset on appointment of liquidator

• Sec 616(4) TCA 1997 – exemption where group relationship ceased on a winding up

• Sec 623(1) TCA 1997 – exemption from clawback of intra-group transfer where company ceases to be a member of the group due to bona fide liquidation

Value Added Tax• Liquidator must register for VAT• Where assets being sold – taxable person• Liquidator is an accountable person• New VAT number allocated

Distributions by Liquidator• Capital Gains Tax• Sec 571(5) TCA 1997• Liquidator is accountable for CGT• Base cost of assets at date acquired by

company – Sec 78(8) TCA 1997• Two exposures to CGT• Disposal of assets by liquidator• Distributions by liquidator to shareholders

Distributions by Liquidator• Sec 583 TCA 1997• Shareholder deemed to dispose of shares

when a capital distribution received• Retirement Relief – Sec 598 TCA 1997 • Technically not applicable• Sec 598(7) TCA 1997 – relief allowed on

capital distributions in course of winding up of family company

• Concession – where company assets sold < 6 months prior to liquidation – TB 26

Retirement Relief & Liquidation• Assets sold preliminary to liquidation• Proceeds included as business chargeable

assets• No concessional relief to distributions in specie• Only cash distributions qualify

Assets Sold by Liquidator

• Assets qualifying for capital allowances• CT on balancing charges• VAT on property – review implications• CGT withholding – CG50 Sec 980 TCA 1997

Stamp Duty• No SD applies to distribution of asset in specie• SD can arises where

– Assets are subject o a mortgage or charge– Shareholders agree to take over third party

debt– Company has outstanding loan payable

which is forgiven• To avoid the ad valerom stamp duty• Clear all mortgages and debts prior to

distribution in specie• Not a clear option – example page 733

Cash Extraction : Impact on Corporate Shareholder versus Individual Shareholder

Havana Hold Co Ltd (“Havana”) is an Irish tax resident holding company with shareholdings in two Irish subsidiaries, Puerto Ltd (“Puerto”) and Rico Ltd (“Rico”). It holds 100% of Puerto and 50% of Rico Ltd. The balance of Rico’s shares is owned by Mr Noonan. Puerto is a trading company while Rico is a property company which holds the commercial premises out of which Puerto trades.

Cash Extraction: Impact on Corporate Shareholder versus Individual Shareholder

Puerto’s business is not performing and despite its directors best efforts, the company will soon be insolvent if it carries on business. Puerto has cash reserves of €100,000 while Rico has cash reserves of €85,000.

The property held by the Rico has a market value of €1,350,000. It originally cost €550,000 in 2003.

Both Havana & Mr Noonan’s original equity investment in Rico is negligible as it the case for Havana’s equity investment in Puerto.


Requirement:

Outline tax consequences of options available to Havana and Mr Noonan on extracting value from Puerto and Rico.

(Draws on materials covered in Module 9 and Module 8)

Option 1: Take a Dividend of the cash remaining in Puerto and Rico

Tax Consequences for Havana of taking a dividend of available Cash in Puerto & Rico. • Havana can take a dividend of €100,000 cash

available for distribution in Puerto assuming it has adequate reserves to pay a dividend

• As both companies are Irish tax resident, dividend from Puerto to Havana will be treated as FII - exempt from CT for Havana.

• As a 50% shareholder of Rico, Havana can take a dividend of €42,500. This dividend is FII - exempt from CT

Option 1: Take a Dividend of the cash remaining in Puerto and Rico

Tax consequences for Mr Noonan of taking a dividend of available Cash in Rico. • Mr Noonan is liable to income tax at his marginal rate

along with PRSI and USC on dividend of €42,500 from Rico.

• Assuming that he is a 55% rate tax payer, this means that he will pay €23,375 in tax on taking the dividend. Rico is obliged to DWT at 20% on dividend payment to Mr Noonan.

• Mr Noonan can claim a credit for DWT by Rico at source but he will still incur a total liability of €23,375 on taking a dividend of €42,500 from Rico.

Option 2: Liquidate Both Puerto & Rico and Take a Capital Distribution of Funds Remaining

A) Tax consequences for Havana of taking a Capital Distribution of funds remaining in Puerto & Rico. • Liquidation of Puerto = net assets available for capital

distribution of €100,000 to Havana assuming Puerto has sufficient sources elsewhere to pay its creditors, clear all its debts and pay its liquidator fees.

• Capital distribution should result in a taxable gain. • As Puerto is a qualifying trading subsidiary of Havana, then

the capital distribution will be exempt under Section 626B(1)(b)(iv) TCA 1997 = an exemption from tax where a capital gain is made by a company on the disposal of a shareholding in a subsidiary.


• Liquidation of Rico involves sale of premises and a capital distribution of its remaining after tax funds and other cash to Mr Noonan and Havana equally.

CT liability on disposal of the premises:Proceeds on Sale €1,350,000Base Cost (€550,000)Net Gain €800,000Taxed at 25% €200,000Net funds for distribution €600,000Cash funds for distribution €85,000Total Capital Distribution €685,000


• Havana is liable to Corporation Tax at 12.5% on rebased chargeable gain on taking a capital distribution of €342,500 from Rico.

• As Rico’s shares derive the greater part of their value from land in the State, Havana is not entitled to S.626B exemption.

• Corporation Tax liability of €42,813 arises on the capital distribution of €342,500 from Rico


B) Tax Consequences for Mr Noonan of Taking a Capital Distribution of Funds Remaining in Rico:

• Mr Noonan is liable to CGT at 25% on the capital distribution on the liquidation of Rico i.e CGT of €85,625 on the capital distribution of €342,500 from Rico.

• As his shareholding is extinguished on the liquidation of the company, and liquidation took place for bona fide commercial reasons – this will ensure that the Revenue do not seek to tax the distribution as Schedule F liable to income tax under anti-avoidance provisions of Section 817 TCA 1997 instead of a capital distribution liable to CGT.


Summary • Havana will not have a tax liability on the extraction

of funds out of Puerto if it takes a dividend = FII• Havana will not have a tax liability on taking a capital

distribution of funds on the liquidation of Puerto = S.626B disposal of qualifying subsidiary.

• Liquidation of Rico & subsequent capital distribution of after tax funds = CT liability as Rico is not a qualifying subsidiary under S.626B

• Mr Noonan will pay income tax at 55% on a dividend from Rico versus CGT at 25% on liquidation of Rico.

Buying and Selling a Business


• Numerous tax issues• Share sales v Asset sales• Tax and commercial differences• Vendor and Purchaser perspectives• Tax Due Diligence – common issues• Purchase agreements – tax warranties and

indemnities

Buying and Selling a Business• Negotiation stage• Agreement for Sale reached• Main terms of transaction recorded in writing• Heads of Agreement• Outlines key terms of transaction• Hard to achieve mutual tax benefits• Vendor’s tax objectives – maxismise after tax

proceeds• Purchaser – minimise after tax consideration


• Different tax objectives – seller and buyer• Difficult to reconcile detailed negotiations• Adjustment to sale consideration?• Assumption of pre-sale restructuring tax

risks?

Share v Asset Sales• Commercial considerations often dictate form

of sale• Sale of separate business unit within a

company?• Does purchaser want only part of business or

certain assets?• Does vendor want to retain certain assets?• Purchaser reluctant to acquire shares –

historic risks• Compromise – pre sale restructuring e.g.

“hive out”

Vendor – Sale of Shares• Tax perspective – share sales preferred• Avoids potential double CGT charge• CGT effective rate 25%• Base cost if previously purchased• Sec 626B TCA 1997 relief for corporate

vendors• Disposal of substantial shareholding in sub• CGT free for holding company• CGT “deferred” until funds extracted from

holding company

Purchaser - Acquisition of Shares• May favour share purchase• Stamp Duty savings – 6% v 1%• SD based on gross value of assets• SD on share sale reflects net value• SD Planning

– Allocation of consideration between assets

– Transfer by delivery– Vendor retaining trade debtors

Purchaser - Acquisition of Shares• Purchaser inherits cost of any latent tax

liabilities• Unrealised gains or latent balancing charges• Reduces gain or profits on further sale of

assets• CGT triggered if company leaves group with

assets transferred from other group companies using CGT group relief

• Sec 79 SDCA 1999 clawback trigger – intra group asset transfers within last 2 years

Vendor - Asset Disposals• Vendor can select assets for sale/retention• Retention of non core assets – investment

properties• Loss position – CGT losses forward• Shelter gains on assets sold• Sale of assets giving rise to CGT loss or

Balancing Allowances• Use of losses within vendor’s corporate

group

Purchaser - Acquisition of Assets

• No liability in respect of history of company • No latent gains on assets acquired• Higher Stamp Duty, although may be able to

mitigate using various methods

Pre Sale Restructuring• Compromise to asset v share deal• Part of business being sold• Restructure to facilitate a share sale• Transfer of assets to newly formed sub with

immediately sale of sub – Sec 79 SDCA and Sec 617 TCA 1997 clawbacks

• Use of restructuring reliefs• Share for share three party swap

Pre Sale Restructuring

• TB 48 – SD reliefs not clawed back • Tax efficient scheme of restructuring• Reconstruction cannot be contingent on sale

or transfer of assets• Reorganisation carried out prior to binding

sale agreement

Pre Sale Restructuring• Mary and Ann own 50% each of Tech Ltd. • Tech Ltd is a computer software manufacturing

company. The company owns a 200 sq. m. manufacturing unit from which the company trades assets plus stocks, equity, debtors, and trade liabilities such as creditors.

• Out of accumulated profits, Tech Ltd has built up a portfolio of investments.

• Mary and Ann have been approached to sell Tech Ltd but new purchaser does not want investments

Pre Sale Restructuring• Mary and Ann should set up a new company (NewCo)• Tech Co “hives out” the trade and trade assets of Tech

Ltd to NewCo & leave investments in original company• Consideration for the transfer of trade is the issue of

shares in NewCo to the shareholders of Tech Ltd (i.e. Mary and Ann)

• This is a three party share for undertaking exchange– See slides 61 to 67

• New company would then be ready for sale to interested party and the investment assets would remain in old co

Pre Sale Restructuring

Mary Ann Mary Ann

Tech Ltd

New Co(Trade &

Trade premises)

Hive out

Anti Avoidance• Value stripping prior to sale of shares• Depreciatory transaction • Target company transfers assets at

undervalue• Target company pays dividends• S 621 TCA 1997 - prevention of artificial

capital losses• Calculation of allowable loss on share

disposal takes account of under-value on assets transferred

Anti Avoidance• S. 621 TCA applies where value of shares

reduced by “depreciatory transactions”• Disposal of assets between group members

other than @ mv• Other transactions between group members

where company whose shares are being sold or its 75% was party to transaction

• Reduction of allowable loss - no impact on gain• S. 622 TCA 1997 – dividend stripping• Distribution includes S 130 TCA 1997 transfers

Anti Avoidance• Sec 591A TCA 1997• Share disposal and abnormal distribution to

vendor• Distribution treated as consideration for

shares• Includes abnormal distribution to persons

connected to vendor• Excess over dividend expected if no share

disposal• Prevents conversion of CGT into FII

Deferred Consideration

• Deferred consideration often included in sale agreement

• Dependent on post deal performance of target business over time period

• Cash consideration – immediate CGT• Shares in acquiring company – S. 586 TCA

1997 – share for share

Deferred Consideration• Sec 563 TCA 1997• Deferred consideration taken into account• No reduction for risk of non recoverability or

where sale consideration contingent• CGT computation amended if deferred

consideration is not paid• Known as “earn outs”• Case law

Deferred Consideration• Marren v Ingles• Share sale - additional amount payable if

shares were quoted within next few years• Deferred consideration had to be valued for

CGT• Separate asset - “right to receive” future

consideration• Additional CGT on future consideration• Gain on actual consideration less value

attributed on share disposal• Very difficult to value future proceeds

Deferred Consideration• Revenue applies Marren v Ingles• Part of consideration

– Deferred or– Contingent and– Uncertain in amount

• Risk of CGT rate increasing• No carry back of loss when “right to receive”

happens

Example• Shares sold March 2008 for €3m• Further sum to be paid in March 2011 based

no increase in turnover• Valued at €200,000 in March 2008• CGT paid in 2008 on gain of €3.2m• Actual turnover increase = €500,000• Additional CGT on €300,000• Actual turnover increase of €100,000• Capital loss of €100,000 – no carry back to

2008

Deferred Consideration• Overall cap on contingent payment• Proceeds not wholly unascertainable• Outside scope of Marren v Ingles?• CGT paid on max consideration• Amended Sec 563(1)(b) TCA 1997 if actual

consideration is less than max• Vendor could receive deferred consideration

in form of shares – Sec 586 TCA 1997 relief

Stamp Duty• Sec 80 SDCA 1999 – may be no relief if

cash consideration• Non share element < 10%• Limit on deferred consideration – SD on the

maximum amount• SD on shares taken at time of sale plus

future cash if 10% rule breached

Tax Due Diligence

• Purchaser obtains sufficient information• Target’s business• Possible adjustment to purchase price• Many areas covered in due diligence

including tax

Cont.

Legal Process – Share Sales1. Draft share purchase agreement prepared by purchaser’s

advisors Provide to vendor’s advisors – includes tax warranties

and indemnities2. Vendor’s advisors review share purchase agreement and

prepare Disclosure Letter3. Final drafts of Share Purchase Agreement and Tax Deed

of Indemnity circulated between parties and agreed

4. Share Purchase Agreement; Tax Deed of Indemnity and Disclosure Letter signed; consideration paid and transaction closed

5. Stamp Duty paid on share transfers by purchaser

Cont. Tax Due Diligence

• Objectives– Ensure tax liabilities of target provided in

its financial statements– Identify tax liabilities that are not provided

in financial statements– Highlight other potential tax exposures

/contentious issues

Due Diligence• Comprehensive Engagement Letter• Review of financial accounts of target co• Prepare due diligence checklist• Adapt general checklist to type of business• Focus on risk areas:

– Status of Tax Returns and submission– Expressions of doubt or Revenue rulings– Details of CT, VAT, PAYE SD, CT, Withholding taxes

• Preparation of Tax Due Diligence Report– Scope, periods and taxes reviewed and results– Assumptions made; documents relied upon;

limitations

Key AreasLosses Tax losses forwardCGT Base Cost Balance sheet value review

CGT intra group transfersPre 6/4/1974 assetsShares owned in company – share for share relief?

Clawbacks Assets acquired from other group companies – CGT or SD clawback

Close Companies Undistributed estate and investment incomeProfessional Services companiesBenefits to participators and associatesLoans to participatorsInterest to directors

Deferred Tax Fully provided for?Assumptions underlying DT provisions

Common areas of reviewReview Group StructureConfirm tax residence of each companyCT and CGT Tax Returns Submitted; accepted; expressions of doubtOutstanding liabilities with no provisionRestriction on loss relief – late filing of returnsLatest Revenue Audit – review issuesSignificant tax issues – provision made?DWT issues for distributions made

Common areas of reviewPAYE/PRSI/Levies- returns and liabilities

Mileage and subsistence claimsProfit sharing and share options schemes- Revenue approvalsConsultants/self employed persons engagedVAT complianceVAT Rates on salesVAT input credit claims – disallowable itemsSD Reliefs granted within past 2 years - conditions

Warranties and Indemnities• Most important part of share purchase

agreement for tax adviser• Purchaser relies on representations made by

vendor• Impose legal obligation on vendor to

compensate purchaser for any undisclosed tax liabilities arising after sale

• Issues identified in Due Diligence determine nature and scope

Other Areas for Review• Tax – definition of taxes covered• Exclusions to liability• Limits on claims• Time limits to make claims

– 5 years/none for fraud or neglect• Notification of claims

Warranties and Indemnities• Outcome of Due Diligence – additional

warranties and indemnities will not provide protection

• Purchase price reduction for specific tax liabilities?

• Indemnity is promise to compensate for specified tax liability

• Purchaser does not need to prove breach or show specific loss suffered

Warranties and Indemnities• Breach of tax warranty is a breach of a

contractual term• Purchaser must show financial loss

suffered• Claim more difficult than under indemnity• Disclosure letter prepared by vendor• Notifies purchaser of matters that could

breach warranties

Warranties and Indemnities• No claim for breach of warranty for issues in

disclosure letter• Focus on general disclosures• Seek specific indemnity if potential liability

disclosed• Vendor’s advisor – limit vendor’s exposure• Draft disclosure letter as comprehensive as

possible

ExampleWarranty There is no material dispute or disagreement

outstanding with any tax authority

Disclosure The target company is currently being audited by the Revenue Commissioners in respect of VAT for the period 1st January 2008 to 31st December 2008. The audit has just commenced and is expected to be completed by 31st January 2010.

Indemnity The vendor indemnifies the buyer in respect of a taxation liability arising as result of an event which is outside the ordinary course of the target company’s business, which occurs after the accounts date, but before completion.

Other Areas• Definition of tax• Exclusion to liability

– Liability reflected in latest audited accounts– Exclusion for pre completion restructure of

target company exclusion - requested by purchaser

– Failure by purchaser to make election to Revenue

• Limits on warranty and indemnity claims• Time limits to make claims min 5 years• Notification and conduct of claims

Round Up• Transfer of Assets and Businesses• Group Reorganisations• Reliefs for Intra group transfers• CGT, Stamp Duty• Clawbacks• Withholding Taxes• Corporation Tax• Value Added Tax

Round Up• Reorganisation of Share Capital• Change of Ownership• Reconstructions• Amalgamations• Transfer of Undertakings• Share for Share• Share for Undertakings• Share Valuations

Round Up• Liquidations• Distributions• CGT and SD • Buying and selling a business• Share v Assets disposals• Vendor and Purchase perspectives• Pre sale restructuring• Deferred Consideration

Round Up• Due diligence• Legal Process for share transactions• Warranties and Indemnities• Disclosure Letter• Definitions and time limits

educating supporting representing stage 3 module 10 reorganisations, liquidations and sale of a...

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