In this blog post, we will look at how you can reorganise your company structure from one single trading company into a group structure without creating a CGT liability and take advantage of the benefits of a holding company can offer.
What are the benefits of a holding company structure in Ireland?
Capital Gains Tax (CGT) Participation Exemption: Irish holding companies are exempt from CGT on the disposal of shares in certain subsidiary companies. This can significantly reduce the tax burden on exits or restructurings of group structures.
Dividends: Dividends can be passed up with no deduction of withholding tax to the parent holding company and be reinvested in other business ventures.
A common worry
A common worry business owners will have is creating a large CGT liability when trying to create a holding company structure in Ireland. Although you can reduce CGT with some reliefs such as Entrepreneur relief, it could still be a very costly error if you end up paying tax when simply rearranging your company structure.
Essentially, you are selling your shares in your trading company to a holding company, which technically is a chargeable event under CGT. But thankfully, you can avail of a section 586 relief to avoid such a liability.
Share for Share Exchange – Section 586 Relief
Where a company issues shares to a person in exchange for shares of another company. The exchange is treated as if the 2 companies were one and the same company and the exchange of shares were a reorganisation of its share capital.
If, for example, A Ltd (Holding Co). issues its shares to a person in exchange for shares in B Ltd (Trading co), that person should be treated as having acquired the shares of A Ltd. at the same time and for the same cost as that person’s original holding in B Ltd. There is no disposal for Capital Gains Tax purposes on the occasion of the exchange.
What this essentially means is if you sell your shares to the holding company and only receive shares in exchange, then no CGT liability will occur.
If there is also cash consideration received as well as the shares then this cash will be treated as a capital distribution. A capital distribution is a payment made by a company to its shareholders that represents a return of capital rather than a distribution of profits. Capital distributions are generally taxed as capital gains rather than income tax.
Disclaimer: this blog post is for informational and educational purposes only and should not be construed as financial advice.