Stamp Duty Aspects of Corporate Transactions
Jonathan Ginnelly, Grant Thornton
Stamp duty is often a tax that is not immediately considered where corporate transactions are being undertaken, or is somewhat of an afterthought once a structure for the acquisition of assets or the restructuring of a corporate group has been determined. However, given the increase in the rate of stamp duty applicable to non-residential property introduced in Finance Act 2017, it is now a real and often substantial cost to be considered when undertaking any type of transaction.
There are a number of provisions in the stamp duty legislation which facilitates certain corporate transactions within groups as well as provisions in relation to group restructurings and mergers. Generally, the main provisions relate to an intra-group transfer of assets and the application of associated companies relief, reconstruction or amalgamation of companies, and the relief provisions in respect of both domestic and cross-border mergers.
Associated Companies Relief
Relief on the transfer of assets within a corporate Group is provided for in s79 SDCA 1999. The relief applies on the conveyance or transfer on sale of assets within the corporate group. A key aspect is that the relief only applies to transactions that fall under the conveyance on sale head of charge. The relief does not apply to any other head of charge. For example if one company in a group issues a lease over property to another company, that transaction is subject to stamp duty under the lease head of charge and as such the provisions section 79 SDCA 1999 will not apply.
In order to benefit from the relief there must be a 90% group in place. In order to meet the 90% test the following conditions must apply:
- one party must be at least 90% owned by the other party, or
- both parties to the transaction are owned by a common body corporate parent either directly or indirectly.
Another important aspect in relation to the make-up of corporate groups for associated companies’ relief purposes is that all entities in the group between either the parties themselves or their common parent must be bodies corporate.
In certain groups, either domestic or international groups, there may be certain non-body corporate entities, for example the group may include a limited partnership at some level. The presence of such an entity that is not itself a body corporate can have the effect of disallowing the relief.
In certain cases it is possible to make a technical submission to the Revenue Commissioners to seek concessional treatment to disregard the non-body corporate entity or to look through such an entity to its body corporate parents in order to establish association for the purposes of section 79 SDCA 1999. It would be necessary to make a submission to Revenue each time concessional treatment is sought.
When determining if the 90% association test is met one has to look at the certain ownership attributes. Section 79(4) SDCA 1999 provides as follows:
Not withstanding that at the time of execution of any instrument the bodies corporate between which the beneficial interest in the property was conveyed or transferred were associated within the meaning of subsection (3), they shall not be treated as having been so associated unless, additionally, at that time—
(a) one such body was beneficially entitled to not less than 90 per cent of any profits available for distribution to the shareholders of the other such body or a third such body was beneficially entitled to not less than 90 per cent of any profits available for distribution to the shareholders of each, and
(b) one such body would be beneficially entitled to not less than 90 per cent of any assets of the other such body available for distribution to its shareholders on a winding-up or a third such body would be beneficially entitled to not less than 90 per cent of any assets available for distribution to the shareholders of each on a winding-up,
and, for the purposes of this section—
(i) the percentage to which one body corporate is beneficially entitled of any profits available for distribution to the shareholders of another body corporate, and
(ii) the percentage to which one body corporate would be beneficially entitled of any assets of another body corporate on a winding-up,
means the percentage to which the first body corporate is, or would be, so entitled either directly or through another body corporate or other bodies corporate or partly directly and partly through another body corporate or other bodies corporate.
There are certain technical conditions which must be met in order for the relief to apply, and these include the following:-
- consideration for the transfer must not be received from or provided by a third party that is not associated with the transferor or the transferee
- the beneficial interest being conveyed must not have been previously conveyed or transferred by any such third-party, and
- the transfer must not be part of an arrangement under which the transferor and transferee were to cease to be associated with each other
Claiming the Relief
As this is a relief and not an exemption, a stamp duty return must be filed in order to claim relief. The return must be filed via ROS within 30 days of the execution of the instrument of transfer.
Certain practical difficulties can arise where all parties might not have an Irish tax number. Where there is a non-Irish incorporated company involved in the transaction, and it is not resident in Ireland for tax purposes, it will need to apply for a temporary stamp duty number in order for the stamp duty return to be filed.
Revenue have a process in place to issue temporary stamp duty numbers to such non-Irish corporations and non-tax resident entities. Included as Appendix 1 is a copy of the application form for such numbers. This application form should be completed and signed on behalf of the company and submitted to Revenue together with a copy of the incorporation documents for the company, with an English translation of same if relevant. The application can be sent to Revenue by email at firstname.lastname@example.org. The tax number should then issue within 5 to 10 working days.
Where there is a party to the transaction that is Irish incorporated but not Irish tax resident, it is not possible to apply for a temporary stamp duty number. Therefore the company will need to register for tax in Ireland in order to obtain a number. This can give rise to practical difficulties and possibly an obligation to file corporation tax returns unless the company can deregister for tax following the filing of the stamp duty return. Therefore, care should be taken in respect of such tax registrations and the filing obligations of any such companies arising out of that registration.
Clawback of Relief
The relief can be clawed back where the association is broken within two years of the transaction. In many cases an intra-group transfer of assets may take place as part of an overall group restructuring or rationalisation of the corporate structure. In such instances the company making the transfer may be liquidated after the transfer has taken place. Where such a set of circumstances applied prior to Finance Act 2017 it was necessary to make a submission to the Revenue Commissioners in order to seek concessional treatment. This concessional treatment, which was routinely granted, would confirm that the relief would remain available provided the assets transferred stayed within the corporate group for the remainder of the two year period, and that the transaction was carried out for bona fide reasons. In Finance Act 2017, Revenue sought to put this concessional treatment on the statutory basis.
To this end Finance Act 2017 introduced subsection 7A to section 79 SDCA 1999. This new subsection provides as follows:
Where a transferor—
(a)is liquidated, or
(b)is dissolved without going into liquidation and a conveyance or transfer has been effected as a result of a merger by absorption (within the meaning of section 463 or 1129 of the Companies Act 2014) by reason of which the foregoing dissolution of the transferor has taken place,
the transferor and the transferee shall, for the purposes of subsections (5)(c) and (7)(b), not be regarded as ceasing to be associated where, for a period of 2 years from the date of the conveyance or transfer—
(i)the beneficial interest that was conveyed or transferred from the transferor continues to be held by the transferee, and
(ii)the beneficial ownership of the ordinary share capital of the transferee remains unchanged.
The statutory provisions appear to be narrower than the previous concessional treatment, where the beneficial ownership of the transferee might not have been considered.
There are some practical difficulties that arise in respect of the conditions that have been set out. In practice, there may be a number of transfers of the same assets or several entities may be wound up in order to implement a larger group restructuring/ rationalisation. In these scenarios there may be multiple movements of assets within the group, with various parties to the transactions (both of the transferor and the transferee) being liquidated, or parties being merged, etc. Consideration is required to ascertain if a clawback of the relief would arise on these transactions.
If the transactions fall outside the parameters of the provisions introduced by Finance Act 2017, then consideration should be given to making a technical submission to Revenue seeking concessional treatment. To date, the Revenue Commissioners seem to be accepting these applications where there are bona fide group transactions occurring.
Reconstructions and Amalgamations
The exemption for company reconstructions and amalgamations is set out in section 80 SDCA 1999. The exemption applies where there is a bona fide scheme for the reconstruction of any company or the amalgamation of any companies.
Finance Act 2017 made a number of amendments to the section, as well as reorganising some of the provisions. The 2017 amendments are largely to reflect the changes implemented by the Companies Act 2014.
The types of transactions which are dealt with under s80 SDCA 1999 are as follows:-
- Two party share for undertaking swap
- Three party share for undertaking swap
- Share for share exchange
Application of the Exemption
In order for the exemption to apply, the acquiring company must be a limited company incorporated in the State or in an EU/EEA jurisdiction, with the company being established or its share capital being increased for the purpose of acquiring an undertaking or at least 90% of the issued shares of a target company.
One of the provisions included in the revised section 80 SDCA 1999 which impacts on the establishment of a company for the purpose of acquiring an undertaking or shares in a target company is to exclude a private company limited by shares to which Part 2 of the Companies Act 2014 applies. The rationale for the inclusion of this provision is that a private limited company does not have the ability to expressly state that it has been established with a view to the acquisition as it does not have a memorandum of association with an objects clause to make such an expression.
The alternative is to use a designated activity company (DAC). It should be noted that this provision relates only to the use of a newly established company for the purposes of an acquisition. It is understood that where there is an existing private limited company in place and a resolution is passed to increase its share capital, for the purposes of an acquisition of the undertaking or to acquire shares in a target company, that this will be sufficient to meet the requirements of section 80 SDCA 1999. However, in situations where a company is newly established for the purpose of an acquisition then a DAC should be used.
The consideration for an acquisition must be comprised of not less than 90% of the issuance of shares in the acquiring company to either the target company (in the case of the two party share for undertaking swap), or to the shareholders of the target company (as part of a share for share exchange or a three party share for undertaking swap).
Overview of Relevant Transactions
In the case of a two party share for undertaking swap, an undertaking is acquired from the target company in exchange for the issue of shares in the acquiring company to the target company.
In the case of a three party share for undertaking swap, an undertaking is acquired by the acquiring company in exchange for the issue of shares in the acquiring company to the shareholders of the target company.
In the case of a share for share exchange, the shares in the target company are acquired by the acquiring company in exchange for the issue of shares in the acquiring company to the shareholders of the target company.
Substantial Identity of Ownership
A key issue in respect of the exemption under section 80 SDCA 1999 is that the consideration shares that are being issued result in substantially the same owners being in place immediately before and after the transaction. The substantial identity ownership requirements must be met in order for there to be a scheme for reconstruction or amalgamation.
In the case of a share for undertaking swap, the shares in the acquiring company must be issued to substantially the same people as held shares in the target company. There has been some case law on this matter and the courts have held that in some instances it may not be possible for all shareholders to be issued shares in the acquiring company (for example in the case of dissenting shareholders). It has been held that where there are such instances the substantial identity of ownership may not necessarily be breached but care should be taken to achieve as close a match as possible.
In the case of a share for share exchange, section 80(2)(a)(iii)(II) SDCA 1999 provides that the shares in the acquiring company must be issued to the shareholders of the target company in exchange for the shares held by them in the target company. Care should be taken where there is more than one class of shares in issue. In such instance the acquiring company will need to issue shares of the same type to the shareholders in the target company in order to meet the identity of ownership requirements.
Although it is necessary for the acquiring company to issue shares of the same type to the target company shareholders, it is not necessarily a requirement that the exact same number of shares be issued. For example, if there are pre-existing shareholders in the acquiring company it may be the case that the target company shareholders need to be issued a greater or lesser number of shares in the acquiring company in order to maintain the correct ownership balance. Thus, provided the shareholders of the target company are issued a sufficient number of shares in the acquiring company, such that proportionately they have the same level of ownership before and after the transaction, then this should be sufficient.
Clawback of Exemption
In the case of a two party share for undertaking swap, the exemption can be clawed back where the target company ceases to be the beneficial owner of the shares issued to it in the acquiring company within a period of two years from the date of the transaction.
In the case of a three party share for undertaking swap there is no similar clawback provision.
In the case of a share for share exchange, a clawback of the exemption can arise where the acquiring company ceases to be the beneficial owner of the shares in the target company within a period of two years following the transaction.
There is a specific anti-avoidance provision within s80 SDCA 1999 which was introduced to disallow the exemption where the target company has not obtained a conveyance of any part of the property comprised in the undertaking. The aim of this provision appears to be to counteract situations whereby an executory contract for asset(s) is held by the target company which is then subsequently completed within the acquiring company after the transfer of an undertaking. Therefore, care should be taken to ensure that the target company has obtained a conveyance in respect of all relevant assets prior to the transfer of the undertaking on which the s80 SDCA 1999 exemption is being sought.
The Companies Act 2014 made provision for the merger of domestic Irish companies. The Companies Act itself was in progress for some time, but the corresponding tax legislation to reflect the provisions of the Companies Act were not incorporated in the tax legislation. Finance Act 2017 introduced the stamp duty provisions required to reflect the changes in the Companies Act.
Prior to Finance Act 2017, it was sometimes difficult to navigate the application of Companies Act provisions and the tax treatment for domestic mergers, and clarity was often sought from Revenue.
Scope of Merger Provisions
Broadly the stamp duty legislation makes provision for a number of different mergers, which are as follows:
- Mergers by absorption
- Mergers by acquisition or by formation of a new company
- Cross-border mergers
Due to the differing nature of each type of domestic merger, separate provisions dealing with the various types of merger have been introduced in the stamp duty legislation. In the case of a merger by absorption whereby the assets of a subsidiary company are acquired by its parent (with the subsidiary ceasing to exist following the transfer) provision has been made within section 79 SDCA 1999 (associated companies relief) to deal with such transactions.
In respect of mergers by acquisition or mergers by formation of a new company, provision for these types of merger has been included in section 80 SDCA 1999 (which deals with schemes of reconstruction and amalgamations of companies). As a result, different conditions and clawback provisions apply to the different types of domestic mergers.
Mergers by Absorption
In respect of mergers by absorption, the transaction essentially results in all the assets of the subsidiary company passing into the parent company with the subsidiary ceasing to exist post transfer. Ordinarily in the case of a transaction where associated companies relief applies it is necessary for the two parties to remain associated for two years following the transaction.
As is the case with mergers, the result of such a transaction is that one of the parties will no longer exist post transaction and as such the two year requirement cannot be met. Section 79 SDCA 1999 has been amended such that where a transferor is liquidated or is dissolved without going into liquidation, the association will be deemed to continue for the two-year period provided that the assets which were transferred as part of the transaction remain within the transferee for a two-year period and the beneficial ownership of the transferee remains unchanged for a two-year period.
As outlined earlier, in many instances a merger of two companies may only be one step in a larger group restructuring/rationalisation. Thus if further mergers, liquidations or transfers of assets take place, clawback provisions may be triggered and it may be necessary to seek a concession from Revenue to avoid the clawback in instances where the assets remain within the wider corporate group.
Mergers by Acquisition or Formation of a New Company
Section 80 SDCA 1999 deals with the provisions for mergers by acquisition, whereby assets of the company are transferred to an acquiring company in exchange for the issue of shares to the shareholder of the transferring company, where the transferring company ceases to exist post transfer.
The amended section 80 SDCA 1999 also deals with situations whereby two or more companies are merged through the formation of a new company such that the assets of the transferring companies are transferred to the new company in exchange for the issue of shares in the new company to the shareholders of the transferring companies. Again, as in the case of the other types of mergers, the transferring companies will cease to exist post transfer.
As was the understanding in the case of a merger by absorption, a merger by acquisition or formation of a new company may have been said to have taken place by operation of law. To deal with this, Finance Act 2017 introduced a provision into section 80 SDCA 1999 such that the resolution passed in respect of a merger by way of summary approval procedure or a Court order in the case of a court-ordered merger will be considered a conveyance on sale and as such fall within the provisions of stamp duty legislation and by extension within section 80 SDCA 1999.
Unlike the case of a share for undertaking swap, which has a 90% share consideration requirement (i.e. the consideration for the acquisition must be comprised of not less than 90% of the issuance of shares in the acquiring company to the shareholders of the target company), this requirement does not apply in the case of mergers for the purposes of the section 80 SDCA 1999 exemption. All that is required is that the mergers come within the definition of merger provided. A “merger” is defined as a merger taking place in accordance with Chapter 3 of Part 9 or Chapter 16 of Part 17 of the Companies Act 2014.
Unlike the case of a two party share for undertaking swap, or a share for share exchange, there is no express provision providing for a clawback of the exemption in the case of a merger. Therefore, provided the conditions of section 80 SDCA 1999 (as they apply to mergers) are correctly applied in the first instance, there should be no clawback issues following the merger. This clawback position is in contrast to the position in section 79 SDCA 1999 where there may be a risk of a clawback if the provisions of subsection 7A are not met (i.e. in respect of the assets remaining with the transferee, and the transferee’s own beneficial interest remaining unchanged). As can be seen from this divergence in treatment of the different types of mergers, care needs to be exercised when carrying out such mergers to ensure that a clawback is not inadvertently triggered.
Provision has been made in the stamp duty legislation for some time in respect of the cross-border mergers. Section 87B SDCA 1999 of the legislation provides an exemption from stamp duty in respect of a merger, a cross border merger or an SE Merger as defined. These terms are defined as follows:
- “cross-border merger” has the same meaning as in Regulation 2(1) of the European Communities (Cross-Border Mergers) Regulations 2008 (S.I. No. 157 of 2008);
- “merger” has the same meaning as in Regulation 4 of the European Communities (Mergers and Divisions of Companies) Regulations 1987 (S.I. No. 137 of 1987);
- “SE merger” means the formation of an SE by merger of 2 or more companies in accordance with Article 2(1) and subparagraph (a) or (b) of Article 17(2) of the SE Regulation.
In contrast to the provisions introduced in respect of domestic mergers by Finance Act 2017, the provisions of section 87B SDCA 1999 are relatively straightforward and provide for a blanket exemption where the relevant types of mergers come within the definitions as outlined above.
While there are certain specific anti-avoidance measures outlined in relation to intra-group transfers to which s79 SDCA 1999 associated companies relief applies, and in relation to the reconstructions and amalgamations exemption provided for in s80 SDCA 1999, there are a number of other anti-avoidance provisions that should be considered when undertaking corporate transactions.
Company Shares – Use of Debt
One such measure relates to s41 SDCA 1999, which deals with company shares. Section 41(2) SDCA 99 provides that where as part of any arrangement the debt of the company or any company which is connected with that company is discharged by the transferee, then the amount of any such debt will be included as part of the consideration paid for the shares and thus subject to stamp duty.
These provisions are designed to counteract schemes whereby debt is artificially created within the company such that the market value of the shares is significantly reduced prior to a sale or transfer. Where the anti-avoidance provisions apply, the amount of such debt will be treated as consideration paid.
It should be noted that where there is genuine debt within the company, which has not been artificially created for the purpose of driving down the value of the shares, then these provisions should not apply. However the timing of the creation of the debt/when it was incurred should be considered and accurately documented if a sale of the shares is pending. However, it should be clear from the company records that the debt was genuinely incurred as part of the business of the company and not for the purpose of avoiding stamp duty.
Other Anti–avoidance Measures
Given the buoyancy of the property market, companies are currently very active in the acquisition and disposal of land or buildings. As such there are a couple of property related anti-avoidance provisions which should be taken into account when companies are dealing with property related transactions.
Resting in Contract
Section 31A SDCA 99 sets out provisions in respect of resting contract. These provisions have been in place since 2013.
The resting in contract provisions apply to prevent situations whereby a contract has been signed in respect of the acquisition of property but a conveyance of the property has not yet taken place. The provisions apply such that where 25% or more of the consideration has been paid in respect of the contract then the contract itself will become subject to stamp duty, unless a stamp duty return in respect of a conveyance of the property (in conformity with the contract) is made within 30 days.
If stamp duty is paid on the contract under s31A SDCA 1999, and a conveyance of that property is subsequently made in conformity with the contract, then no further stamp duty should be payable. It is important that the conveyance is “in conformity” with the contract in order for there to be no exposure to stamp duty on the ultimate conveyance.
Shares Deriving Value from Irish Land
Finance Act 2017 introduced section 31C SDCA 1999 which deals with shares in a company that drive their value or the greater part of their value directly or indirectly from Irish land or buildings (excluding residential property). The section applies to impose the higher 6% rate of stamp duty on such shares, as opposed to the 1% that applies to other shares. The section also applies to interests in a partnership or units in an IREF.
The section also makes provision to counteract the use of any mechanism to effect the transfer of property that may not give rise to a stamp duty exposure. For example, in the case of a company the use of a subscription and redemption mechanism may have the effect of transferring ownership of the company to another party without the use of a stampable document. The provisions of section 31C SDCA 1999 are such that where there is a change of control of the property any contract or document used to effect such a change of control will itself become stampable at the 6% rate.
Appendix – Application form for tax number (Foreign Bodies Corporate)
Application for a tax reference number by a Foreign Body Corporate, or a person
authorised by a Foreign Body Corporate, to facilitate the filing of a Stamp Duty
Name of Foreign Body Corporate:
Address of registered office of Foreign Body Corporate:
Date of incorporation: Country of incorporation:
Details of responsible person:
Capacity (Director/Secretary/other (if other, please state):
E-mail address: Phone number:
I attach Certificate of Incorporation or Articles of Association or other documentary evidence of the body corporate’s name and address and date of incorporation (or where these documents are not in English or Irish, a certified translation (by a registered translator) of the portion of the documents which contain the body corporate’s name, address and date of incorporation).
I confirm that the above mentioned body corporate:
- is not already registered for tax in Ireland and
- at the date of this application has no taxable income and is not trading in Ireland.
Signed: _________________________________ Date: ___________________
Responsible person for applicant foreign body corporate
If you wish to authorise another person to apply for a tax reference number for the
above named body corporate, please complete the following authorisation:
On behalf of I, ,authorise the following person to submit this application for a tax reference number:
Email of contact person: Phone number of contact person:
Responsible person for foreign body corporate