Business Taxes

10.2.Outline the meaning of terms specifically related to the close company rules

10.2.1.Close company (Section 430(1) TCA 1997)

A close company (subject to certain exceptions outlined below) is an Irish resident company, which is controlled by:

a) five or fewer participators or

b) participators who are directors, without any limitation on the number.

The legislation provides that the rights of associates of participators be added to the participators’ own rights when determining whether ‘control’ exists i.e. a participator and his associate are treated as one (see the below section on “control”).

Before dealing with the exceptions, we will analyse some of the new terms included in the above definition of a close company.

10.2.2.Participator (Section 433(1) TCA 1997)

A participator is any person having an interest in the capital or income of a company. The term includes (i.e. not exhaustive):

a) a shareholder (the most common example you will come across)

b) any person who possesses or is entitled to acquire share capital or voting rights in the company i.e. an option holder

c) any loan creditor of a company (defined below)

d) any person entitled to receive or participate in distributions from the company or any amounts payable by the company to loan creditors by way of premium on redemption

e) any person who can secure income or assets (whether present or future) of the company which will be applied either directly or indirectly for his benefit i.e. position of power.

10.2.3.Associate of participator (Section 433(3) TCA 1997)

An associate means, in relation to a participator:

a) any relative or business partner of the participator.

b) the trustees of any settlement of which a participator or any relative of his (living or dead) is the settlor

c) where the participator is interested in shares of the company which are subject to any trust or are part of the estate of a deceased person, an associate would be any other person interested therein e.g. trustees, executors and beneficiaries. In this definition trusts for employees, directors and their dependants and approved pension funds are specifically excluded.

For the purposes of the definition of associate, relative means husband, wife, civil partner, ancestor, lineal descendent, brother or sister (Section 433(3)(a) TCA 1997). Therefore all ‘in laws’ are excluded, as are nieces and nephews. Note – this definition of relative is different to that used to determine “connected persons” in Section 10 TCA 1997 and has a very narrow application.

Task 10.1

Compare and contrast the meaning of “relative” in Section 433(3)(a) and Section 10 TCA 1997.

As noted above, the interests of a participator and their associates are aggregated and treated as one participator in determining whether the company is under the control of five or fewer participators. For the purposes of determining the aggregate, an associate of an associate cannot be linked to a participator e.g. a man’s wife’s sister’s shareholding cannot be added to his shareholding if he is taken as the participator. However, if the wife is treated as the participator then the shareholdings of her husband and her sister would be added to her shareholding as her husband and her sister are each associates of the wife in their own right.

10.2.4.Director (Section 433(4) TCA 1997)

This term includes:

a) any person occupying the position of directors by whatever name called

b) any person in accordance with whose directions or instructions the directors are accustomed to act (e.g. shadow directors)

c) any person who is a manager of the company and is either on his own or with one or more associates the beneficial owner of or able to control (directly or indirectly) 20% or more of the ordinary share capital of the company.

Remember that the definition of a close company specifically refers to directors, in that once a company is controlled by directors (regardless of number) it is a close company.

10.2.5.Loan creditor (Section 433(6) TCA 1997)

The term means a creditor in respect of any debt incurred by the company:

a) for any money borrowed or capital assets acquired by the company or

b) for any right to receive income created in favour of the company

c) for consideration the value of which to the company (at the time the debt was incurred) was substantially less than the debt.

The term also includes any redeemable loan capital issued by the company.

Ordinary trade creditors are not considered to be loan creditors. Also, a bank will not be regarded as a loan creditor in respect of any money lent by it to the company in the ordinary course of its (i.e. the bank’s) business.

10.2.6.Associated company (Section 432(1)> TCA 1997)

A company is to be treated as another’s associated company at any given time if, at that time or any time within the previous year, one of the two has control of the other or both are under the control of the same person or persons. Remember – “person” includes companies and individuals.

10.2.7.Control (Section 432(2) TCA 1997)

Hopefully you have noticed an important recurring term in most of the above definitions – control.

The term “control” in Section 432(2) is very broadly defined – it can be direct or indirect, actual or contingent. While this section relates primarily to the interpretation of the close company rules, other provisions within the Taxes Act import this definition of control. For example, you will recall from Chapter 2 that Section 247 TCA 1997 uses the meaning of control within this section to determine whether an investing company has a material interest in an investee company. Section 10 TCA 1997 also uses the definition of control in Section 432 TCA 1997. Other provisions may include their own definitions of control or use the general meaning of control set out in Section 11 TCA 1997 (e.g. Section 130(5)(b) TCA 1997 uses the definition of control in Section 11 TCA 1997).

Under Section 432(2) TCA 1997, a person (individual or company) is regarded as having control of a company if that person exercises, is able to exercise or is entitled to acquire control, whether direct or indirect, over the company’s affairs and in particular if that person possesses or is entitled to acquire the greater part of:

(a) the share capital; or

(b) voting power of the company; or

(c) the income of the company on a full distribution among participators (ignoring the rights of loan creditors); or

(d) the assets of the company on a full distribution to shareholders in the event of a winding up.

The following additional points should be noted in assessing control:

(i) Where two or more persons together satisfy any of the above conditions they will be regarded as having control of the company.

(ii) The rights and powers of nominees of a person are to be taken into account in determining whether a person has control of a company

(iii) There will be attributed to any person the rights and powers of any company or companies which he/she alone or with his/her associates controls and also the rights and powers of his/her associates. Note that it is not necessary to attribute the rights and powers of an associate to that person

(iv) Rights which a person is entitled to acquire at a future date or will at a future date be entitled to acquire must be included.

Task 10.2

Compare and contrast the meaning of “control” in Section 11 TCA 1997 and Section 432 TCA 1997.