To teach students how to recognise the various forms of company distributions and how to deal with them for withholding tax or corporation tax purposes.
Once you have studied this chapter, you should be able to:
Personal Taxes Manual
■ Chapter 15: Taxation of Investment Income: Schedule D Case III
■ Chapter 17 Taxation of Irish Dividend income: Schedule F
PRINCIPAL LEGISLATIVE PROVISIONS
■ Schedule 2A of TCA 1997
Corporation Tax, Finance Act 2010, Irish Tax Institute
■ Chapter 6 Distributions and withholding tax
RELEVANT PAST EXAM QUESTIONS
■ 2015, Autumn, Question 3(b)
■ 2016, Autumn, Question 4(b)
■ 2017, Autumn, Question 3(a)(b)
8.1.Define a “distribution” for tax purposes and compare it to a distribution for company law and accounting purposes
8.1.1.TCA 1997 definition of “distribution”
In a practical sense where a company generates profits it is the ultimate owner i.e. the shareholders of the company who ‘own’ these profits.
However, legally the company itself is deemed to own the profits and they can only be transferred to the shareholders by ‘distributing’ them. The most common form of a distribution that a company makes to its shareholders is a dividend, which basically equates to a payment by a company of its profits to its shareholders.
No deduction is allowed in calculating taxable income or profits for corporation tax on any dividends declared or paid by the company.
The purpose of this section is to clearly set out exactly what constitutes a ‘distribution’ by a company from a tax point of view.
In relation to any company, ‘distribution’ means:
1. Any dividend paid by the company including a capital dividend. A capital dividend is one paid out of a capital profit (Section 130(2)(a) TCA 1997). For example, this would include normal dividends on ordinary shares by public and private limited companies.
2. Any other distribution out of the assets of the company (in cash or otherwise) in respect of shares in the company with the exception of:
(a) a bona fide repayment of share capital or
(b) a distribution equal in amount or value to new consideration received by the company for the distribution (Section 130(2)(b) TCA 1997)
An example of this form of distribution would be the amount of a premium payable by the company on the redemption of shares in excess of the nominal value of the shares and any premium paid at the time of issue of the shares.
A distribution is made out of the assets of the company if the cost falls on the company (Section 135(5) TCA 1997).
3. Any amount received for the redemption of bonus securities, which were issued in respect of existing shares in the company other than for new consideration e.g. the redemption of bonus shares which did not involve a financial outlay by the shareholder for cash (Section 130(2)(c) TCA 1997).
4. Certain types of interest payments:
(a) interest on bonus securities issued (Section 130(2)(d) (i) TCA 1997). For example when a company issues bonus debentures and pays 10% interest annually.
(b) interest on securities convertible into shares or which carry an entitlement to receive shares (Section 130(2)(d)(ii) TCA 1997). For example interest paid on loan notes which are convertible into ordinary shares.
(c) interest which depends to any extent on the company’s results (Section 130(2)(d)(iii)(I) TCA 1997). For example, loan notes where annual interest payable is €10,000 plus 10% of the company’s earnings before interest, depreciation and tax. Interest as a percentage of turnover or related to the market value of assets held by the company would also be treated as a distribution under this provision. Note that Section 130(2A) disapplies this provision in certain cases.
(d) interest which is greater than a commercial rate of return (Section 130(2)(d)(iii)(II) TCA 1997). For example if a company pays interest on a loan at a rate of 25% when the general commercial rate charged on similar loans to company’s with similar credit risk profiles is 10%, it will be treated as having paid a distribution of the amount of the interest above the normal commercial rate.
(e) interest on securities which are connected with shares (Section 130(2)(d)(v) TCA 1997). In this case, securities are connected with shares if there is any condition or transfer right attaching to the security where it would be advantages to acquire or dispose of a proportionate holding of shares in the company. For example interest on a security such as a bond where the transfer rights on the bond prevent the transfer of the bond to a person who is not a shareholder in the company.
(f) interest paid to a 75% non resident parent or sister company except a sister company 90% of whose ordinary share capital is owned directly by an Irish resident company. Refer back to Chapter 3 for exemptions from this provision in certain circumstances (Section 130(2)(d)(iv) TCA 1997) (remember the link with Section 452).
5. Transfer of assets or liabilities between a company and its members or vice versa where the market value of the benefit received by the member exceeds the value of any new consideration given by him (unless both parties are Irish tax resident and one party is a 51% subsidiary of the other or both are 51% subsidiaries of a third company which is resident for tax purposes in a relevant Member State as defined) (Section 130(3) TCA 1997).
6. Bonus issue of shares followed by a repayment of share capital (Section 132 TCA 1997). In this scenario a company issues bonus shares and then repays the original share capital. The repayment which matches the nominal value of the bonus shares is treated as a distribution as in this situation there has been no change in shareholding.
7. A repayment of share capital followed by a bonus issue of securities (Section 131 TCA 1997). This scenario is the opposite of 6 above. In this situation the company repays ordinary share capital and then issues replacement securities. The original share repayment is treated as a distribution up to the value of the new securities issued, as there has been no change in shareholding.
8. Expenses incurred in providing benefits or facilities of any kind for shareholders or their associates where the company is a close company (see Chapter 10 of this manual) (Section 436 TCA 1997).
9. Loan interest in excess of the prescribed limit of 13% paid to a director or his associate on a loan by a director (where he has a material interest in the company) to the company if the company is a close company (see Chapter 10 of this manual) (Section 437 TCA 1997).
10. Payments by employee share ownership trusts (ESOTs) where there is an associated approved profit sharing scheme (APSS) (Section 130(2)(f) TCA 1997).
11. Payments made by a quoted company on the redemption of its own shares from its shareholders are treated as distributions where the main purpose of the redemption is to allow shareholders participate in the profits of the company without receiving a dividend. This is legislated for in Section 175(1) TCA 1997. Note that any payment by a quoted company on the redemption of shares which is not treated as a distribution will not be allowed as a deduction in calculating Case I taxable income – Section 176A TCA 1997.
Section 130(1) TCA 1997 specifically provides that a distribution in respect of share capital on a winding up is not to be treated as a distribution for the purposes of the Corporation Tax Acts. It is also important to note that where certain conditions are met, the redemption of share capital at a premium will not be treated as a distribution for the purposes of corporation tax but will instead be treated as a disposal of shares liable to capital gains tax (or corporation tax on chargeable gains in the case of a company) (Section 174 TCA 1997). Any payments which are not treated as a distribution under these provisions are not allowed as a deduction in calculating Case I income of the company (Section 176A TCA 1997).
In general if the share transaction does not result in a change in shareholder it is a taxed as income from a distribution and not CGT.
Comment on whether or not the following transactions are distributions for tax purposes:
1. A Ltd obtained a loan of €50,000 from its UK resident parent Company, B Ltd, for use in its trade. A Ltd is a 100% subsidiary of B Ltd. B Ltd intends charging interest of 10% per annum for the use of these funds.
2. C. Ltd proposes to issue as fully paid up 100,000 bonus shares of €1 each to its shareholders.
3. D Ltd issued 50,000 bonus debentures in March 1987. It has been paying interest on these debentures at 10% pa. It is now proposed to repay these debentures at a premium.
4. A shareholder of E Ltd has agreed to lend the company €80,000 at 26% per annum for an indefinite period when the market rate on such a loan would be 8%.
5. F Ltd intends transferring one of its motor vehicles to a shareholder for €500 although the car is currently valued at €6,300.
8.1.2.Company law and accountancy definition of “distribution”
Section 123 subsection (1) and (2) of the Companies Act 2014 defines ‘distribution’ under company law. The definition for accounting purposes is substantially similar.
The Act lists transactions which are treated as distributions such as the payment of dividends, issuing of share capital, redemption of preference shares, etc.
As noted above, only some of these, e.g. dividends, are actually treated as a distribution from a taxation point of view but as they all affect a company’s distributable reserves they are all treated as distributions under company law and for accounting purposes.
Section 117 Companies Act 2014 provides that a company shall not make a distribution except out of profits available for that purpose (commonly known as “distributable reserves”).
8.2.Outline how dividend withholding tax applies to a distribution
8.2.1.Application of dividend withholding tax to distributions
This withholding tax applies to all “relevant distributions” made by Irish resident companies. Relevant distributions are defined in Section 172A TCA 1997 as any distribution within the meaning of Chapter 2 of Part 6 of TCA 1997 (i.e. Section 130 TCA 1997, etc.), any amounts deemed to be distributions under the close company rules and any scrip dividends as per Section 816 TCA 1997. Dividends paid to the government and certain government agencies (e.g. NAMA), are excluded.
The company making the distribution (or its authorised withholding agent) is obliged to withhold tax at the standard rate of income tax (currently 20%) from the amount of each relevant distribution.
Chapter 8A of Part 6 of TCA 1997 consists of 14 sections, Section 172A to Section 172M that provide the detailed rules for the operation of dividend withholding tax. The provisions of Chapter 8A TCA 1997 are supplemented by Schedule 2A TCA 1997.
The legislation provides for a number of exceptions to this withholding tax for distributions made to certain excluded persons and certain qualifying non-resident persons. These exceptions are covered in a later section.
8.2.2.Calculate the dividend withholding tax applicable to a distribution
The withholding tax is deducted from the gross distribution payable to the shareholder.
A Ltd has an issued share capital of 100,000 ordinary shares. Mr A owns 10% of the company.
For the year ended 31 December 2018 the company declares and pays a dividend of 10c per share.
Mr A’s dividend is as follows: 100,000 shares × 10% = 10,000 shares × 10c per share = €1,000.
The dividend withholding tax is deducted on the gross dividend: €1,000 × 20% = €200.
The company withholds €200 and pays Mr A €800.
Mr A will be taxed under Schedule F on the gross distribution of €1,000 at his marginal rate of income tax. He will be entitled to a tax credit equivalent to the amount of the tax withheld by the company. DWT is a refundable tax credit to the extent that the amount withheld exceeds Mr A’s income tax liability.
8.2.3.Outline the administrative procedures related to dividend withholding tax
The main principle is that the distributing company must withhold the tax from all relevant distributions paid by it irrespective of the category of the person to whom the distribution is paid unless the company has satisfied itself that the recipient is a “non-liable person” (as defined in Section 172A TCA 1997) entitled to receive a distribution without withholding tax (see below).
Chapter 8A TCA 1997 also provides for the tax to be deducted or, where appropriate, exempted, by an “authorised withholding agent” acting for the company making the distribution. In such cases, the amount of the distribution is first paid gross by the company to the authorised withholding agent who is then put in the place of the resident company responsible for applying the dividend withholding tax rules, receiving declarations by non-liable persons, making returns, paying the tax deducted to the Collector General, etc. The provisions dealing with authorised withholding agents are set out in Section 172G TCA 1997.
The legislation also provides for distributions being made, whether by the distributing company or by an authorised withholding agent, indirectly through one or more “qualifying intermediaries” to the persons entitled to the distributions. In any case where the distribution is made through a qualifying intermediary, the distributing company or, if relevant, the authorised withholding agent paying the distribution is required to deduct the dividend withholding tax unless the qualifying intermediary has given the company or the withholding agent a declaration that the person for whom the intermediary is collecting the distribution is a non-liable person entitled to be exempted from the withholding tax. See Section 172E TCA 1997.
Dividend withholding tax – statement for recipients of distributions (Section 172I TCA 1997)
Each time a company makes a distribution Section 172I TCA 1997 requires the resident company making the relevant distribution (“the payer”) to give the recipient of the relevant distribution a statement in writing showing:
(a) the name and address of the resident company,
(b) the name and address of the person to whom the distribution is made,
(c) the date the distribution is made,
(d) the amount of the distribution (before any dividend withholding tax), and
(e) the amount of the dividend withholding tax (if any) deducted.
In cases where the resident company’s relevant distribution to the person beneficially entitled to the distribution is made through an authorised withholding agent (“the payer” in this case), the authorised withholding agent is required to give the person beneficially entitled a statement in writing showing:
(a) the name and address of the authorised withholding agent,
(b) the name and address of the resident company on whose behalf the authorised withholding agent has acted,
(c) the name and address of the person to whom the distribution is paid by the authorised withholding agent,
(d) the date the distribution is made by the resident company (through the authorised withholding agent),
(e) the amount of the distribution (before any dividend withholding tax), and
(f) the amount of the dividend withholding tax (if any) deducted by the authorised withholding agent.
In either case, the requirements of Section 172I TCA 1997 may be met by including the above particulars on the dividend voucher or counterfoil which Section 152(1) TCA 1997 obliges the payer of the distribution to issue to the person to whom the distribution is paid.
It is possible for paying companies to issue electronic dividend counterfoils, if required.
Dividend withholding tax – returns, payments, etc. of the tax (Section 172K TCA 1997)
Section 172K TCA 1997 requires each resident company which makes relevant distributions in any calendar month to make a return to the Collector-General, using Form DWT 30, of the relevant distributions made by it in that month and to pay to the Collector-General the dividend withholding tax (if any) which it is liable to deduct from these distributions.
This return is due to be made and any dividend withholding tax paid over to the Collector-General no later than the 14th day of the following month (Section 172K(1) and (2) TCA 1997).
The resident company’s return for any calendar month in which it has made any relevant distributions is required to give the following particulars in relation to the distributions made by it in the month:
(a) the name and tax reference number of the resident company making the return,
(b) the name and address of each person to whom a relevant distribution was made by the company in the month (whether or not a person is beneficially entitled to the distribution and whether or not any tax was withheld from the distribution),
(c) the date in the month on which each such relevant distribution was made by the company,
(d) the amount of the relevant distribution made to each person in (b),
(e) the amount of dividend withholding tax (if any) which was deducted by the company from each relevant distribution in the return, and
(f) the aggregate of the amounts of dividend withholding tax deducted by the company from all the relevant distributions made by it in the month (Section 172K(1) TCA 1997).
Section 172K(1)(H) TCA 1997 states that where distributions have been paid without the deduction of dividend withholding tax due to the exemption provided by Section 172B(7) TCA 1997, the return must show what distributions have been exempted by virtue of being paid out of tax exempted profits or gains.
Accounting for dividend withholding tax
Dividend payments are shown in a company’s Statement of Changes in Equity rather than in the Statement of Comprehensive Income. Accounting for the withholding tax on a dividend paid is therefore quite straightforward, as dividends are a distribution of the profits of a company rather than an expense. All movements are ‘below the line’, meaning they do not affect the companies reported profit figure.
An Irish company is likely to have a mixture of shareholders, some of whom will be exempt from DWT. Therefore, a dividend payment is likely to consist of portions of dividends paid gross and portions of dividends paid net. The journal entries to book a dividend would therefore be:
With the gross amount of dividend declared
When the dividend is paid the journal entries would be:
With the net amount of dividend paid
DWT is due in the month after the dividend is paid and this journal is therefore separate to the dividend payment journal.
When the dividend is paid it would be recorded as:
With the net amount of DWT paid
Cell Ltd is an Irish company with 100,000 €2 issued share capital. 40% of its shareholders are Irish individuals (20% DWT will apply to any dividend) and 60% are Irish companies (no DWT will apply as all have properly applied for, and been granted, an exemption from DWT). Cell Ltd declares a dividend of €5 per share in January and pays the dividend in March.
The total dividend payable is €500,000 [€5 × 100,000 shares].
The gross dividend payable to the Irish companies is €300,000 [€500,000 × 60%].
No DWT will apply so the net dividend is also €300,000.
The gross dividend payable to the Irish individuals is €200,000 [€500,000 × 40%].
DWT at 20% applies, being €40,000 [€200,000 × 20%].
The net dividend payable to individuals is therefore €160,000 [€200,000 – €40,000].
The journals to book this are:
With the dividend declared
With the amount of dividend paid to shareholders
With the net amount of DWT paid to Revenue Commissioners
8.3.List the exemptions from dividend withholding tax and associated administrative requirements and apply these in practical situations
8.3.1.Dividend withholding tax exemptions
Section 172B(4) TCA 1997 requires an Irish resident company that makes a relevant distribution to any person to deduct the dividend withholding tax unless it has satisfied itself that the person in question qualifies to have the distribution paid to him or her (or it) without the withholding tax.
Therefore once the distributing company has satisfied itself that a particular person is included in the exemption list below and has submitted the necessary documentation, it is entitled to pay all subsequent distributions to that person without any withholding tax unless and until the distributing company subsequently gets any information which indicates that the person may no longer be entitled to the exemption.
Section 172B(8) TCA 1997 provides that DWT does not apply to the distributions paid by an Irish resident 51% subsidiary to its Irish resident parent company.
Section 172C and Section 172D TCA 1997 list the persons (who have made the appropriate declaration set out in Schedule 2A TCA 1997 to the distributing company or, where relevant, to the authorised withholding agent or to a qualifying intermediary) who are non-liable and are entitled to receive relevant distributions without deduction of dividend withholding tax. The categories of persons are as follows:
Exemption from DWT for certain persons (Section 172C TCA 1997)
The paying company is not required to operate DWT on making distributions to the following persons:
(a) a company resident in the State which is a 51% parent of the paying company (Section 172B(8) TCA 1997)
(b) a company resident in the State which is not a 51% parent of the paying company but which has made a declaration
(c) an approved occupational retirement benefit scheme and an approved “self-employed” retirement benefit contract or trust scheme,
(d) a qualifying share ownership trust,
(e) a collective investment undertaking,
(f) a charity approved as such for tax purposes,
(g) Personal Retirement Savings Accounts (PRSAs) and exempt unit trusts (Revenue approved charities and pension schemes),
(h) certain sporting bodies,
(i) designated brokers for special portfolio investment accounts,
(j) trustees of approved minimum retirement funds and approved retirement funds,
(k) trustees of special savings incentive accounts,
(l) certain persons who would be entitled to exemption from income tax in respect of distributions, primarily focusing on permanently incapacitated individuals,
Exemption from DWT on distributions to Non-Irish resident recipients (Section 172D TCA 1997)
Subject to having received the appropriate declaration from the recipient, a paying company does not have to operate DWT on distributions to
(a) an individual who is neither resident nor ordinary resident in the State but who is resident by virtue of the law of that territory in a relevant territory
(b) a non-resident company which is by virtue of the law of a relevant territory, resident for tax purposes in that relevant territory but is not under the control of persons resident in Ireland,
(c) a non-resident company which is under the control (directly or indirectly) of persons who, by virtue of the law of a relevant territory, are resident for tax purposes in that relevant territory and is not under the control (directly or indirectly) of persons who are resident in Ireland
(d) a non-resident company the principal class of shares of which or of its 75% parent company are substantially and regularly traded on a recognised stock exchange in the State, in a relevant territory or on any other stock exchange approved by the Minister for Finance
For the purposes of DWT, “relevant territory” is defined in Section 172A TCA 1997.
In addition to the broad exemptions from DWT for non-residents set out above, the EU Parent/Subsidiary Directive, as implemented in domestic legislation, also provides exemption from DWT on the payment of distributions to certain parent companies. There is no requirement for the recipient company to make a declaration to the paying company in order to avail of this exemption. To qualify for this exemption, the recipient must own (directly) 5% of the share capital of the paying company during an uninterrupted period of 2 years and the parent company must be resident for tax purposes in an EU Member State. Note, this exemption is not available if the parent company exists as part of a scheme or arrangement where one of the main purposes is the avoidance of DWT.
A similar provision, but with a requirement for 25% ownership, applies where the parent company is resident for tax purposes in Switzerland (Section 831A TCA 1997).
You will cover these two provisions in more detail in your Part 3 studies.
Effect of DWT exemption provisions
In all of the above situations where exemptions from DWT apply, the individuals/entities involved will be able to receive the distribution free from DWT.
In the case of a charity it will receive greater cash flow for its operations and will not have to spend inefficient administrative time in applying to Revenue for refunds.
Pension funds will receive higher returns on their investments as they will be receiving gross income rather than net income to reinvest.
In terms of foreign investors, its encourages inward investment into Ireland and reduces red tape in terms of having to rely on double taxation agreements to receive the distribution free of withholding tax.
As noted above, to claim the dividend withholding tax exemption under the categories noted above, generally a form of declaration is required to be made by the recipient to the paying company. The exceptions are where the paying company is a 51% subsidiary of an Irish resident company and where the provisions of Section 831 TCA 1997 apply.
The format of the declarations are set out in paragraphs 3 to 11 of Schedule 2A TCA 1997.
In most respects, the form of the declaration is similar for each category, but the actual wording in the declaration is specific to the category concerned and the specific section of legislation under which the exemption is claimed e.g. the declaration for Irish entities claiming exemption under s. 172C(2)(a) should comply with Schedule 2A(3) TCA 1997 while charities claiming under s. 172C(2)(e)(ii) should complete a declaration as per Schedule 2A(7).
These types of non-resident declarations and certificates must be renewed every 5 years. They expire on 31 December of the fifth year after the year they were issued, Schedule 2A para (2) and (2A) TCA 1997.
For all exemptions for the Irish residents noted in 8.3.1, with the exception of (f), form V3 must be completed and forwarded to the company making the distribution (not the DWT section of Revenue) prior to the distribution being made. Category (g) covering PRSA’s has a separate form.
Non-resident individuals use form V2A and non-resident companies use form V2B.
In the absence of a completed form the company paying the distribution must withhold DWT. If an entity suffers withholding tax and could have claimed an exemption, there is a facility to claim refunds.
Requirements to retain declarations etc.
Section 172B(4A) TCA 1997 requires every resident company to keep and retain dividend withholding tax records of all declarations or notifications made or given to the company for the purposes of Chapter 8A of Part 6 and Schedule 2A TCA 1997. All such declarations and notifications must be retained by the company for a minimum of 6 years after they were made or given to it.
Further, if Revenue request a longer retention period in relation to the declaration made by any person to whom the resident company made relevant distributions, the company must retain the declarations or notifications which are given to it by that person at least 3 years after the date on which the company ceases to make relevant distributions to that person.
Section 172B(4A) also requires the company on being given notice by the Revenue Commissioners to make available all declarations, certificates or notifications and allow the Revenue Commissioners take extracts or copies.
Comment on whether the following shareholders in Z Ltd can avail of an exemption from DWT and if so, quote the section number and schedule paragraph.
A. Irish resident company – 60% shareholder
B. French resident company (controlled by French owners) – 5% shareholder
C. US resident individual – 10% shareholder
D. Irish resident individual – 10% shareholder
E. Bermuda resident individual – 5% shareholder
F. Irish pension scheme – 10% shareholder
If the company fails to withhold tax when it should, it is liable for the tax to Revenue - therefore the policy of the company should always be to deduct the tax unless the appropriate documentation is on file.
Figure 8.1. Deduction of withholding tax
8.4.Assess the income tax or CGT implications of distributions in specie and the accounting treatment of these
In specie is the Latin word for “in-kind” and generally means the payment of a distribution in assets other than cash.
Section 172B(3) TCA 1997 deals with the case where a resident company makes a distribution which consists of something other than cash (but not a scrip dividend covered by Section 172B(2) TCA 1997). In this case, the resident company which makes the non-cash distribution to the shareholder (other than a shareholder exempted from the dividend withholding tax) is liable to pay to the Collector-General an amount of dividend withholding tax equal to income tax at the standard rate (currently 20%) on the value on the distribution.
Since no tax is actually withheld from the non-cash distribution, the distributing company is empowered by Section 172B(3)(c) TCA 1997 to recover from each shareholder an amount equal to the tax paid to the Collector-General in respect of that shareholder’s non-cash distribution.
If the shareholder does not repay the tax deducted and paid by the company the distribution must be “grossed up”. In this situation the non-cash distribution given to the shareholder is treated as being the amount net of DWT (80% of the entire distribution) and the balance of 20% is then treated as the withholding tax. Therefore a non-cash distribution to the value of €80 is regrossed to €100 (€80 / 80%) and the withholding tax is €20 (€100 × 20%). The company will be required to pay over the difference between the initial DWT payment made on the non-cash distribution (€16 or €80 × 20%) and the DWT on the grossed up distribution.
It should be noted that the grossing-up effectively assumes that the shareholder does not repay the DWT and effectively applies DWT to the DWT not recovered. If the shareholder repaid the DWT on the distribution it would not have been necessary to gross-up as the shareholder would only have received the value of the distribution net of the DWT that it repaid to the company.
DT Ltd, an Irish resident holding company with issued ordinary share capital of €1 million, holds investments in other companies valued at €6 million. These include 100,000 shares in RS Ltd, an Irish incorporated and tax resident company which does not derive the greater part of its value from Irish specified assets. It decides to hive off its shareholding in RS Ltd by distributing it to its own ordinary shareholders in proportion to their holdings in DT Ltd.
On 12 June 2018, DT Ltd makes this distribution when the market value of the 100,000 RS Ltd shares is €400,000 (€4 per share).
The shareholders in DT Ltd and the number and value of shares in RS Ltd distributed to them are analysed as follows:
The UK company would be exempted from the dividend withholding tax under Section 172B(6) TCA 1997 as the UK company owns more than 5% of the share capital of DT Ltd.
Assuming that the 3 Irish resident companies have made the declarations required by Section 172C(2)(a) TCA 1997, the distributions made to them are also exempted from DWT.
The 30 Irish resident individuals, the Bermuda resident company and the Cayman trust do not qualify for any exemption.
The dividend withholding tax which DT Ltd is required to pay to the Collector-General is calculated on the value of the shares in RS Ltd distributed to the non-exempt shareholders as follows:
DT Ltd is liable to pay dividend withholding tax of €23,200 to the Collector-General by 14 July 2018 (14th day of month following month in which distribution made).
DT Ltd is entitled to recover this €23,200 from the above shareholders in respect of whose distributions the tax is payable. In practice this may prove difficult.
As noted above, the 30 Irish resident individuals are then taxed under Schedule F on the gross dividend of €44,000 at their marginal rates of tax with a tax credit for the withholding tax €8,800.
If the shareholders do not repay the DWT to the company, the gross-up provisions apply such that the total distribution by the company is deemed to be €145,000 (i.e. €116,000/80%) and the company is liable to pay DWT of €29,000 (i.e. €116,000 × 20%/80%).
If any of the Irish resident shareholders were to sell their shares in RS Ltd at a later date, their base cost will be the market value of those shares at the time of the distribution (Section 547(1)(b) TCA 1997) i.e. €44,000 for the individuals.
The non-resident shareholders will not be subject to Irish CGT as they are not within the charge to CGT and the shares are not specified Irish assets.
As DT Ltd has disposed of its shareholding in RS Ltd it is liable to corporation tax on chargeable gains on any uplift in value from the date of its acquisition of the RS Ltd shares to the distribution date (unless the provisions of Section 626B TCA 1997 apply).
8.4.2.Accounting treatment of in specie distributions
The accounting for in specie distributions is governed by IFRIC (International Financial Reporting Interpretations Committee) 17 - Distributions of non-cash assets to owners.
IFRIC are not full IAS/IFRS standards but are provided to deal with accounting issues as they arise in business.
The main points are as follows:
1. The distribution is recognised at the asset’s market value
2. The difference between the market value and carrying amount (book value) of the asset being transferred is taken to the Statement of Comprehensive Income
Example 8.4 – Accounting treatment of example 8.3
Assume that the shares in RS Ltd cost DT Ltd €250,000 in 2007.
On its transfer to the shareholders, DT Ltd is deemed to have disposed of the shares in RS Ltd for €400,000 being the market value of the shares at the time of the distribution.
This gain would be regrossed as a chargeable gain and included in DT Ltd’s corporation tax return (assuming that the provisions of Section 626B TCA 1997 do not apply).
Being the transfer of RS Ltd to DT Ltd’s shareholders
Being tax owing on deemed investment sale
Being DWT due from shareholders on non-cash distribution
On the basis that the shareholders pay the DWT back to DT Ltd the above journal would effectively reverse, as €23,200 would be received by DT Ltd and debited to its bank account.
If they do not pay the DWT to DT Ltd a further distribution is declared, as per example 8.2, and the journal below is in addition to the €23,200 bank payment.
Being the additional DWT on non-cash distribution
8.5.Outline the tax implications of scrip dividends and the accounting treatment of these
Section 172B(2) TCA 1997 applies a special rule for dividend withholding tax where the relevant distribution is a “scrip dividend” – that is, where the shareholder elects to take additional shares in the company making the distribution instead of a cash dividend in a case in which the distributing company gives its shareholders the option of taking either cash or additional shares.
In such a case, Section 816 TCA 1997 treats the shareholder who elects to take additional shares as if he or she received a distribution of an amount equal to the cash dividend that the shareholder would have received if he or she had not elected to take the shares. Section 816(2)(b) TCA 1997 charges the distribution to Schedule F when the shares in the company are quoted and Section 816(2)(c) TCA 1997 charges the distribution to Schedule D Case IV when the shares in the company are unquoted.
Where this happens, Section 172B(2) TCA 1997 provides that, instead of withholding a cash amount from the distribution, the distributing company is required – in issuing the additional shares to each shareholder (other than a shareholder exempted from the dividend withholding tax) – to issue a reduced number of shares. The distributing company is then required to pay to the Collector-General an amount of dividend withholding tax equal to tax at the standard rate of income tax on the cash amount that the shareholder would have received if he or she had not elected to take the shares (the “cash foregone”).
The reduced number of additional shares to be issued to the shareholder is the number of shares which have a value, equal to the cash forgone as reduced by an amount equal to income tax at the standard rate calculated on the amount of the cash foregone.
A plc, a quoted company paying a dividend to its ordinary shareholders on 15 October 2018, gives the shareholders an option of electing to acquire 1 new ordinary share for every €5 of dividend.
Mr BA, an individual resident in the State, who would be entitled to receive a cash dividend of €350, elects instead to take the additional shares.
If the dividend withholding tax did not apply, Mr BA would receive 70 new ordinary shares instead of the dividend.
S. 816(2)(b) TCA 1997 requires Mr BA to be taxed under Schedule F on the full €350 (the cash foregone due to the election to take the shares).
S. 172B(2) TCA 1997 requires that the number of additional shares to be issued to Mr BA is to be reduced (from 70 shares) to the number of shares which have a value calculated as follows:
Assuming that the value of A plc’s ordinary shares at 15 October 2018 (date of distribution) is still €5 per share the reduced number of additional ordinary shares to be issued to Mr BA is calculated as follows:
€280/ €5 = 56 shares
Although only receiving 56 shares valued at €280, Mr BA is still charged under Schedule F for 2018 on the full €350 as if he had received 70 shares (Section 172B(5) TCA 1997), and he is given a credit for dividend withholding tax of €70 against his income tax chargeable (Section 172J TCA 1997).
In effect, he has suffered this tax by getting only 56 shares (instead of 70 shares).
When Mr BA sells the shares that he has received as scrip dividends his base cost for the disposal will be the market value of the shares at the time of the distribution (Section 547(1)(b) TCA 1997); i.e. €280.
8.5.2.Accounting treatment of scrip dividends
IAS 32 Financial Instruments Presentation governs the accounting treatment of dividend declarations.
When a scrip dividend is issued the treatment is as follows:
1. Reduce profits with market value of dividends issued
2. Increase share capital with market value of dividends issued (split between par value and share premium account)
Example 8.6 – Accounting for example 8.5.
Assume that shares have a €1 par value
The journal entries for the above example would be as follows:
Being issue of scrip dividends. The share premium is the difference between the market value of the share, €5 and its par value, €1.
Being DWT paid on scrip dividend declaration
8.6.Judge whether a transaction will be treated as a distribution for tax purposes and if so, calculate the tax arising on the distribution
8.6.1.Identifying a distribution
When a company undertakes a transaction that comes within the meaning of one of the activities described in section 8.1 the transaction is deemed to be a distribution.
Therefore if a company pays a shareholder a dividend it is a distribution under Section 130(2)(a) TCA 1997. If the shareholder also works in the company and receives a salary for his labour, his salary will not be a distribution (as the payment is in respect of the services he performs for the company and not in respect of the shares he holds) and will be taxed under Schedule E, Section 19 TCA 1997.
It should be noted that the general rule for identifying a distribution is that they are normally a return on an investment whereas other payments, such as salary, arise due to the provision of a service in return for remuneration.
Dividend withholding tax is not the final tax liability payable on the distribution. Instead, it is a withholding tax that is treated as a payment on account of the final tax liability of the recipient. This means that a shareholder may suffer DWT but will get a credit for the tax when computing his final tax liability under Schedule F.
8.6.2.Taxation of an individual (Schedule F)
Absent any provision to the contrary, all distributions paid to individuals are chargeable to income tax. Section 20 TCA 1997 charges these distributions under Schedule F.
An individual is charged to income tax on the receipt of a distribution at his marginal rates of tax and is allowed a credit for the dividend withholding tax withheld (Section 172J TCA 1997).
If the withholding tax (and any other payments on account) exceed the individual’s income tax liability for the year of assessment, the individual will be entitled to a refund of that excess.
As noted above, relevant distributions to non-resident persons beneficially entitled to those distributions from resident companies may be exempt from DWT if the non-resident files the appropriate declaration form with the paying company. This exemption from withholding tax is not an exemption from the liability to tax that the person may have in respect of that distribution. In addition to exemptions from Irish tax that may arise under various double tax treaties, Section 153 TCA 1997 provides an exemption from the liability to Irish tax under domestic legislation for certain non-residents. The definition of “qualifying non-resident person” in Section 153 TCA 1997 is broadly the same as that set out in Section 172D TCA 1997 and therefore, if a shareholder has made the appropriate non-resident declaration to the company, they will also likely be exempt from Irish tax on the distribution.
If the shareholder is a qualifying non-resident person within the meaning of Section 153 TCA 1997, they are exempt from Irish tax on the distribution (Section 153(4) TCA 1997). If the shareholder is an individual who is not Irish resident but is not a qualifying non-resident person, their liability to Irish tax on distributions from Irish resident companies will be limited to the standard rate of income tax (not their marginal rate)(Section 153(6) TCA 1997).
A DAC has an issued share capital of 100,000 ordinary shares. Mr A owns 10% of the company.
For the year ended 31 December 2018 the company declares and pays a dividend of 10c per share.
Mr A’s dividend is as follows: 100,000 shares × 10% = 10,000 shares × 10c per share = €1,000.
The dividend withholding tax is deducted on the gross dividend €1,000 × 20% = €200.
The company withholds €200 and pays Mr A €800.
Mr A’s liability to income tax
The above example ignores PRSI and the USC, both of which may also be payable.
8.6.3.Taxation of a company (franked investment income)
Section 129 TCA 1997 exempts fully from corporation tax the receipt of most distributions from an Irish resident company. However, you will recall from your Part 1 studies that a non-resident company may be liable to income tax (as opposed to corporation tax) on Irish source income. In that case, the recipient company would need to rely on other exemptions to avoid a liability to Irish tax.
Note the general exemption under Section 129 TCA 1997 does not apply to certain distributions by companies out of profits earned when they were not resident in Ireland. Section 129A TCA 1997 taxes such distribution under Schedule D Case IV in certain circumstances. The provisions of Section 129A TCA 1997 will be covered in more detail in your Part 3 studies.
Although distributions may be exempt from corporation tax under Section 129 TCA 1997, you will learn in chapter 10 that they are included in surchargeable income under close company surcharge legislation.
8.7.Compare the taxation of distributions to the taxation of other methods of extracting cash from companies
This chapter has discussed the taxation implications of extracting cash from companies by means of distributions.
Some of the other methods are as follows:
■ Through payroll – cash can be extracted in this manner if the shareholders are individuals who are directors or employees. This is more likely to occur in small owner managed companies rather than quoted Plcs. The company will be entitled to a deduction in calculating Case I trading profits to the extent that the salary costs are incurred wholly and exclusively for the purposes of the trade. The key difference for the company between amounts paid through payroll and distributions is the potential for a tax deduction for the amount paid. There is no difference in the income tax liability for the individual shareholder. You will learn about pensions as a method of rewarding shareholder directors in Part 3.
■ Capital distributions on a winding up – when a company is liquidated the remaining assets (after payment of all liabilities) are distributed to shareholders. The shareholders are treated as disposing of their shares in the company and will be liable to capital gains tax or corporation tax on chargeable gains as appropriate, absent any exemptions or reliefs that may apply. If the liquidation process results in a disposal of assets by the company, it may also have a capital gains tax or corporation tax on capital gains liability.
■ Loans to shareholders – As you will see in later Chapter 10, loans by close companies to participators are essentially treated as a distribution until they are repaid by requiring the company to re-gross the amount of the loan and pay over an amount of income tax on account to the Revenue (this is repayable as the loan is repaid). This is not an issue for non-close companies. The loan may also be treated as a “preferential loan” under BIK rules if the participator is a director or employee. In all cases, the provisions of company law must be observed at all times, the loan must not exceed 10% of the net assets of the most recent Statement of Financial Position laid before an AGM. A loan is not a permanent form of cash extraction – it must ultimately be repaid by the shareholder.
From a taxation comparison point of view:
1. Distributions are relatively inefficient as they are not allowable against corporation tax and are taxed at the shareholders’ marginal rates of income tax in the case of individuals. They are however an efficient means of transferring profits to Irish resident corporate shareholders.
2. Schedule E payroll is allowable against corporation tax but is also taxable in the hands of the shareholder at their marginal rates.
3. Capital distributions on a winding up is the most efficient in that it is only taxed at capital gains tax rates, however it can only be used in certain circumstances.
4. Loans to shareholders are a temporary extraction method only as they are taxed at marginal rates if they are forgiven, with no corresponding allowance against tax for the company.
8.8.Conclude on when different methods of cash extraction are most appropriate
The key question to ask when seeking to extract cash from a company is the frequency of the extraction.
Ongoing business with large shareholder base
■ Annual dividends are the most efficient method of distributing profits to shareholders.
■ From an administrative point of view it is the same tax rate for all shareholders. It allows the shareholders to organise their tax affairs correctly and have the necessary certificates on file to avoid the withholding tax.
■ For corporate investors they can receive the dividends tax free, subject to the close company surcharge.
Smaller owner managed on-going business
■ Director’s fees and pension contributions are usually more efficient, as they are deductible against corporation tax. The company may however issue dividends if it has a high annual close company surcharge.
■ If the company is being wound up, a liquidation is the best solution as it extracts the residual company cash at capital gains tax rates rather than the higher income tax rates.
■ If a shareholder requires immediate cash funds for a period of time, a Section 438 TCA 1997 loan can be given, subject to compliance with company law. This section should only be used if the loan can be repaid relatively quickly, given potential BIK charges if it is not at a commercial interest rate and any close company related issues (Chapter 10).
Rogan Ltd, has Case I income for the year ended 31 December 2018 of €100,000. The company director and controlling shareholder wants advice on the most tax efficient option to extract this income from the company.
Cash extractions options:
Total tax due = €12,500 + €17,500 + €17,500 = €47,500
Total tax due - €12,500 + €28,875 = €41,375
If the loan is not repaid there will be income tax on it as a deemed salary payment as follows:
Regross loan €87,500/80% = €109,375
Income tax × 20% = €21,875 (Section 239 TCA 1997)
Total tax due – €12,500 + €21,875 = €34,375 plus BIK on the loan on an annual basis.
There may also be close company issues which are addressed in (Chapter 10).
As discussed at 8.7 and 8.8 each method has its own advantages and disadvantages. In the case of Rogan Ltd the advice on an ongoing basis would be to pay an annual salary as the company does not suffer any surcharges and therefore there is no advantage in declaring dividends.
The liquidation option is only viable when the company ceases to trade and the director’s loan will need to be repaid and therefore is not viable long term. There are also company law issues.
The above examples ignore PRSI and the USC, both of which may also be payable.
The following transactions will be treated for tax purposes as set out below:
1. As A Ltd is a 100% subsidiary of a non-resident company the interest would initially be disallowed under Section 130(2)(d)(iv)(I). However as A Ltd is using the loan in its trade, it can elect under Section 452(2)(b) to allow the interest not be treated as a distribution.
2. The issue of the bonus shares by C Ltd does not constitute a distribution.
3. Since the interest is in respect of bonus redeemable securities the interest payments are treated as distributions (Section 130(2)(d)(i) TCA 1997). The amounts received by shareholders on redemption of these bonus securities are also treated as a distribution (Section 130(2)(c) TCA 1997).
4. An interest rate of 26% per annum for an indefinite period is more than a reasonable rate of return. That part of the interest, which is in excess of a reasonable rate of return, is therefore a distribution (Section 130(2)(d)(iii)(II) TCA 1997).
5. The difference between the market value and the amount charged will constitute a distribution (Section 130(3)(a) TCA 1997.
The DWT status of the various owners in Z Ltd is as follows:
A. Irish resident company – Section 172B(8) TCA 1997, as the company has at least a 51% holding no documentation is required. If the holding was less than 51%, the exemption under Section 172C(2)(a) could be availed of, provided the information required under paragraph 3 of Schedule 2A was forwarded to the paying company.
B. French resident company – Section 172B(6) TCA 1997, as the company has at least a 5% holding no documentation is required. If the holding was less than 5%, the exemption under Section 172D(3)(b)(i) TCA 1997 could be availed of, provided the information under paragraph 9 of Schedule 2A was forwarded to the paying company.
C. US resident individual – Section 172D(3)(a) TCA 1997and paragraph 8 of Schedule 2A.
D. Irish resident individual – no exemption available, DWT will be due.
E. Bermuda resident individual – no exemption available, DWT will be due.
F. Irish pension scheme – Section 172C(2)(b) and paragraph 4 of Schedule 2A.