Business Taxes

10.4.Judge whether a company is a close company or not

Figure 10.2. Determine whether a company is a close company

The following chart is useful in determining whether or not a company is a close company.

Example 10.2

A Ltd has an issued share capital of €100,000 held as follows:

Trustees of a settlement made by Mr. Apple 45,000
Mrs. Apple 6,000
Ten other unrelated shareholders 49,000
100,000

Mrs. Apple and the trustees of the settlement made by Mr. Apple are associates (as a relative of Mrs Apple was the settlor of the trust). Therefore, the rights and powers of the trustees are attributed to Mrs. Apple. The company is regarded as close as Mrs. Apple controls 51% of issued share capital.

Example 10.3

B. Ltd is an unquoted company and has an issued share capital of 50,000 €1 ordinary shares and 100,000 in €1 preference shares. The preference shares are non-participating and non-voting. None of the directors are participators in the company.

The capital is held as follows:

Shares Equates to votes (top 5) Control via issued share capital (top 5)
Ordinary Preference
A 4,000 4,000
B 7,500 10,000 7,500 17,500
C 2,000 25,000 2,000 27,000
D 2,500 9,000 2,500 11,500
E 800 12,000 12,800
F 1,000 6,000 1,000 7,000
Others (owning less than 500) 32,200 38,000
Total 50,000 100,000 17,000 75,800

Control Tests

1. Only 34% of the voting power is controlled by five or fewer participators, therefore not close company using this test.

2. However, more than half of the total issued share capital (ordinary and preference) is held by five or fewer participators, i.e. 75,800 out of 150,000, therefore the company is close.

Example 10.4

C Ltd. has an issued share capital of 100,000 held by the following Directors:

A Director 12,000
B Director 10,000
C Director 5,000
D Director 6,000
E Director 6,000
F Director 12,000
G Director 9,000
Others (each owning < 5,000) 40,000
100,000

Is C Ltd a close company? Would your answer be different if F is a manager of the company, not a director?

(i) The company is not under the control of five or fewer participators. However, it is under the control of its directors and is therefore a close company irrespective of the number of directors.

(ii) The company is not under the control of five or fewer participators (because F does not hold 20% or more of the ordinary share capital he does not rank as a director). The company’s directors then hold 48% of the issued share capital which means that it is not director controlled and is therefore an “open” company.

Example 10.5

D Ltd. has an issued share capital held as follows:

%
A 6
B (A’s wife) 5
C (A’s brother) 6
D (A’s daughter) 3
E (Trustee of a settlement made by A) 5
F (daughter of C i.e. A’s niece) 9
G (A’s nominee) 15
Fab Ltd (Company controlled by A) 6
H (trustees of a settlement made by A’s deceased son) 5
5 others, unconnected to A or each other, each holding 8% 40
100

D Ltd is a close company as A is deemed to control 51% of the company.

A’s own interests are aggregated with those of his associates i.e.

A, B, C, D, E, G, Fab Ltd and H

Note that F who is A’s niece is not an associate as she is not within the scope of the definition of relative.

Example 10.6

E Plc, a quoted company trading on the ISEQ has the following issued share capital held:

%
A Ltd: An open company 25
B: Director 10
C: Manager 25
D: Director 25
E: Plc’s pension fund 4
Other unconnected shareholders, each holding < 5% 11
100

To determine whether E plc is a close company the approach below is adopted:

1. Is E plc under the control of five or fewer participators or any number of participators who are directors? C is deemed to be a director as he is a manager holding in excess of 20% of issued share capital. Therefore, as the directors B, C & D hold 60% of the share capital the answer is Yes.

2. Do the principal members hold more than 85% of voting power? Only 4 ‘persons’ hold over 5% of voting power each. Together these four principal members hold exactly 85% so the answer to this question is (Note that when considering the ‘85% test’ all principal members are included i.e. there is no exception for open companies or approved pension funds.) No.

3. Does the public hold at least 35% of the voting power? The public comprises A Ltd and the unconnected shareholders who together hold 36% of the voting capital so the answer to this question is Yes.

4. Does E plc trade on a recognised Stock Exchange? Yes – ISEQ

5. Have there been share transactions in the last 12 months? We need to find out to determine whether E Plc satisfies the conditions necessary for exemption from close company status.

It should be clear to you by now that almost all domestic Irish companies are close companies for tax purposes.

The purpose of all the anti-avoidance rules you will study in this chapter is to make it difficult if not impossible for family held companies to enter into artificial arrangements designed to achieve “non-close” status.

Task 10.3

Alpha Ltd has an issued share capital of €150,000 made up as follows:

Ordinary Shares
Mr. J Jones 25,000
Mrs. Jones (wife of Mr. Jones) 13,000
Mr. P Jones (brother of Mr. J Jones) 3,000
Mr. B Eliot (brother of Mrs. Jones) 2,000
Beta Ltd (controlled by Mrs Jones) 5,000
Gamma Ltd. (controlled by Mr. J Jones) 10,000
Trustees of settlement made by Mr. J Jones 5,000
Twenty other unrelated shareholders 37,000
100,000
‘A’ Ordinary Shares (non voting)
Twenty other unrelated shareholders 50,000
150,000

Is this company within the definition of a close company?

Task 10.4

Companies Delta and Gamma are quoted on the Irish Stock Exchange and their shares have been dealt with in the preceding twelve months. The shares are held as follows:

Delta Gamma
Shares held by:
Close Company 1 40% 40%
Close Company 2 20% 30%
Approved Superannuation Fund 20% 20%
Individuals each holding < 5% 20% 10%
100% 100%

Are these quoted companies close companies?

Summary of the disadvantages of close company status

There are a number of disadvantages, for both the company and its shareholders, which arise from a company being regarded as a close company.

The ‘Close Company’ legislation is found in Part 13 of the Taxes Consolidated Act 1997. It consists of a number of penal anti-avoidance measures that have the potential to impact on almost all Irish companies. It is essential that you become intimately familiar with these provisions.

The main disadvantages are considered in detail in the following parts of this section and can be summarised as follows:

1. Certain benefits in kind and expense payments to participators and their associates are treated as distributions (Section 436 TCA 1997);

2. Interest paid to certain directors or their associates in excess of a prescribed limit is treated as a distribution (Section 437 TCA 1997);

3. Loans to participators or their associates must be “grossed up” and income tax paid (Section 438 TCA 1997);

4. Loans to participators or their associates which are subsequently written off or forgiven will be treated as income in the recipient’s hands i.e. assessable to income tax (Section 439 TCA 1997);

5. A surcharge of 20% is levied on the undistributed after tax investment and rental income of trade companies and an additional surcharge of 15% is levied on 50% of the after tax professional income of a ‘service company’ (Section 440 and Section 441 TCA 1997 respectively).

Students should remember that these are in addition to the normal rules which apply to items to be treated as distributions as discussed in Chapter 8, such as transfers of assets or liabilities at undervalue are treated as a distribution (Section 130(3)(a) TCA 1997) as well as resulting in negative capital gains implications (Section 547 & Section 589 TCA 1997);