Close Company Surcharge

Close Company Surcharge
Most Irish resident companies are what are called 'close' companies. A Close Company is a company that is controlled by five or fewer participators or is controlled by any number of participators who are directors.
The Close Company provisions set out in the Taxes Consolidation Act 1997 have four main implications for a company and its participators/directors.
  1. Certain benefits-in-kind and expense payments to participators or associates will be treated as distributions.
  2. Interest in excess of a specified rate paid to directors or their associates will be treated as distributions.
  3. Loans to participators or their associates must be made under deduction of tax and, if the loan is forgiven, the grossed-up amount is treated as income in the hands of the recipient.
  4. A surcharge of 20% is payable on the total undistributed investment and rental income of a close company. Close "service" companies (e.g. Solicitors, Accountants, Doctors, Journalists, and Quantity Surveyors) are also liable to a surcharge of 15% on one-half of their undistributed trading income.
Background to the Close Company Surcharge
Historically, Irish income tax rates were higher than Irish corporation tax and capital gains tax rates. It was therefore advantageous for individuals to accumulate income in a company where it was taxed at a lower rate. The individuals could then extract the money from the company tax efficiently, e.g. by way of capital rather than income or by way of interest free loan. The individuals would pay capital gains tax on any capital receipt – often little or no tax would actually be due because of the availability of losses or indexation relief.

Close company surcharge was then introduced:
  • To act as a disincentive to passive (non-trading) income being generated and kept in close companies, and
  • To make it more difficult for shareholders of close companies to extract funds from the company tax efficiently.
By the mid 1990’s the gap between the standard corporation tax rate and the top income tax rate had narrowed considerably – the close company legislation then became more of an administrative headache than an anti-avoidance measure. However, now the gap between income tax (40% income tax, plus PRSI, and the USC) and corporation tax (12.5% or 25%) is as wide as it is, a greater focus by Revenue can be expected on the anti-avoidance aspects of the legislation.

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