Group Transfer Relief

Corporate Groups

Capital gains tax reliefs exist to cater for the fact that businesses are often organised in groups of companies.  A group of companies under Company Law comprises a holding company and one or more layers of subsidiaries

Companies are  in the same group when one is a parent or subsidiary of another (either directly or indirectly )or both are subsidiaries of another company). Having different companies can be useful from a business organisational perspective.  The trading risk associated with the business may be isolated within a single company.

CGT Groups

The definition of a group for capital gains tax purposes is narrower than that for company law purposes.  For company law purposes a group can be constituted with a 50 percent plus one shareholding or indeed alternatively by the issue of certain shares by which another company may control the composition of the board of directors.

For capital gains tax purposes, a group must comprise of a holding company and companies which are 75 percent subsidiaries.  This means that the holding company must own 75 percent of the share capital.  This 75 percent may be owned directly or indirectly.  Where it is held indirectly it is held via another subsidiary.

The required shareholding refers to beneficial shareholding.  It is not enough that the shares are nominally held.  The company must be beneficial owner of the shares and must be entitled to 75 percent of the divideinds / distributions and 75 percent of the assets on a winding up.  This is to prevent the creation of artificial groups by creating different classes of shares with less than the standard rights normally attaching to shares.

The principal company and the 75% subsidiaries must be resident in an EEA state or the United Kingdom. The 75% holding may be direct or indirect.

Rationale for Relief

Transfers between companies may raise capital gains tax issues. As set out in other chapters, there are favourable reliefs from corporation tax in respect of the payments between group companies.

All things being equal, a transfer between two connected companies is deemed to be a sale at open market value.  The  capital gains arising since the company acquired the asset would be chargeable but for relief.  For this reason, there exist reliefs to facilitate the transfer of assets between group companies.

A very obvious form of tax avoidance would be to transfer an asset to a new dummy company within the group and then sell the company out of the group.  For this reason, anti-avoidance deems there to be a capital gain when the company ceases to be a member of the group.  Other more complex, anti avoidance Legislation also exists.

Transfer of Assets

Where there is a group for capital gains tax purposes, an asset may be transferred free of capital gains tax.  It is  deemed to pass at the price that yields no loss or no gain.  This determines that there is no capital gain by the disposing company. The requirement for the withholding tax clearance certificate will still generally apply.

The relief applies to the transfer of chargeable assets between group members. These are assets that would otherwise be subject to capital gains tax

When an asset acquired by way of an intragroup transfer is disposed of, the base price is the original acquisition price and date. The transfer within the group is ignored. The normal provisions in relation to capital allowances, balancing charges, etc., apply.

The acquiring company is deemed to acquire the asset at the same time and at the same cost as the disposing company.  Therefore from a s CGT perspective the holding by group is treated in effect,  as a whole. When the asset is ultimately disposed of by the acquiring company for capital gain during the requisite time is charged.

The transferor and transferee must be resident in Ireland. In the case of non-resident companies, relief is available for Irish branch assets, which are specified assets, i.e., land, minerals, branch assets, or companies deriving their value from such assets.

Leaving the group

Where a company receives assets from another company within its group and then leaves the company, a capital gains tax charge arises.  This is deemed to arise at the date the asset was originally acquired.  The provision  applies where the company leaves the group within 10 years.

In both of the above cases the gain is calculated  retrospectively as at  the date of the transfer of the asset not the date on which the company leaves the group.

The gain is assessed on the company leaving the group. However the parent or other group companies may also be assessed for the tax.

There are exemptions where the company leaves by reason of liquidation or bona fide a commercial reason or where both the transferee and transferor group leaves the group together and both remain associated.

There is another exception where the company technically leaves the group as a result of a merger with another company.

Leaving Issues

When a company leaves the group having taken a transfer within the previous 10 years, it is deemed to have disposed of and reacquired the asset at market value on the date of the original transfer. The company leaving the group is liable for the tax arising at that point.

This does not apply where the company ceases to be a member of the group due to winding up for commercial reasons.

If there is a transfer of assets and a company’s tax residence changes to a country with which Ireland does not have a double taxation treaty within 10 years, the clawback also applies.

It does not apply if the company leaves the group as part of a merger. This is an arrangement whereby the acquiring non-group company acquires an interest in all or part of the business of the group company, and one or more members of the group acquire an interest in the business of the acquiring non-group member.

At least 25% of the interest acquired by both remaining group companies and the acquiring non-group companies must be by way of ordinary share capital. The balance of the interest must be in the form of share capital of any kind. The value of the interest received by the remaining group members must be substantially the same as the value received by the acquiring non-group member. The consideration received by the remaining members, other than the small proportion applied to acquiring interest in the business of the acquiring companies, must meet these conditions.

Pre-Entry Losses

There are restrictions on pre-entry losses. These are losses that occur prior to a company becoming a member of the group. They are designed to counter the use of losses within companies that are purchased.

Capital losses incurred or arising before a company joins the group may only be offset against gains on the disposal of assets if:

1. They are disposed of in the same accounting period prior to entry.
2. They were owned by the company immediately before entry.
3. They were acquired from another group member after joining the group and used continuously for the purpose of the trade since before joining the group.

Assets acquired under reconstruction from a group company also joining the new group, or if both companies were in a group relationship prior to joining, are deemed to be owned by the company from the date of joining.

Effectively, the two companies joining the group are treated as one for this purpose.

The pre-entry loss applied to the disposal of an asset held by a company before it joined the group is the lesser of the loss based on market value at the date on which the company joined the group or the amount of the loss arising on disposal.

The pre-entry loss may be offset against gains where the asset was disposed of before the entry date but in the period during which the company joined the group, and the company making the disposal is the one that held the pre-entry assets immediately prior to the entry date. The pre-entry assets and the asset on which the gain arises must be held by the same company immediately prior to the entry date. The gain disposed of and the asset disposed of (regardless of when acquired by the company which held the pre-entry assets) must have been used since its acquisition for the purpose of the trade carried out by the company that held the pre-entry assets immediately before the entry date.

Artificial Use of Losses

There is anti-avoidance legislation designed to prevent the use of the relief to create artificial loss.  Where assets are transferred between group members in a so-called depreciatory transaction, the loss arising from subsequent sale of shares in that company (which has been denuded of value by the transfer) is not allowed.

There is an anti-avoidance provision when a company is denuded of value prior to a sale by a substantial dividend.  Generally dividends within a group are free of tax.  Like the depreciatory transaction provision its effect is to deny the loss  that would  otherwise arise.

There are rules restricting the purchase of companies which hold capital losses on their assets.  This is to prevent companies purchasing other companies as members of their group and utilising the losses, triggering the losses on both assets for offsetting against profits  in the group.

Losses which exist at the time the company is purchased may only be used against gains in respect of assets held at the time it entered the group and assets which are later acquired and used exclusively for the purpose of a trade conducted by it.

Unlike the position with  corporation profits tax loss, it is not possible to pass capital gains tax losses around a group.  It is necessary to transfer the assets to the company with the off-setting gain and realise the loss in that latter company.

The capital gains tax relief does not apply to transfer certain transfers of share and loan capital which are effectively comprise repayment or redemption of the capital.

Transfers to and from Stock

Where assets are held as trading stock (as opposed to capital assets) where there is a  transfer to another group company to be held as an investment, (i.e., a capital asset) the transferring company is deemed to have appropriated the  asset from stock before the transfer at its acquisiton value.The transferee is therefore deemed to have acquired has its value when it first was acquired.  There is deemed to be disposal as a no profit and no loss.  The acquiring company has been deemed to acquire at the original acquisition cost.

In the reverse situation where a capital asset is transferred to be held as stock in another company, it is deemed to be transferred by the transferor company at cost and the transferor company is deemed to acquire it cost and resell and reacquire it at market value.  The  acquiring company is deemed to realise a profit on the deemed sale which is subject to corporation profits tax.

The relief in in respect of transfer of assets other than trading stock between members of groups of companies applies to companies which are resident in countries with which the state has a double taxation treaty  pursuant to Finance Act 2017.

Stock Issues

When assets are transferred from one group company to another and there is a change in status from trading stock to investment, the following applies: If an asset, which is a capital investment asset of the transferor, becomes trading stock of the transferee, the transferee is treated as acquiring the asset other than as trading stock and immediately appropriating it to trading stock. The general rules apply.

When relief applies in relation to the transfer, it is required at the original base cost. It is then deemed disposal giving rise to chargeable gains. It may be taken into the income statement at its market value, and its base cost is the market value at acquisition. Alternatively, in accordance with the relief within general rules, it can be taken into stock at the original acquisition value at the date of appropriation.

If an asset is transferred to trading stock by the transferor and becomes a capital/investment asset in the hands of the transferee, it is deemed to be appropriated from stock immediately before the transfer. The above provisions apply. The transferee then disposes of the stock at its value as it was taken into the income statement. Group relief will apply. The transferee acquires the asset with a base cost which is the amount deemed to be received by the transferor. This will generally be the original cost of the stock.

Debts

The relief does not apply to:

• Disposals of debt due to a group company by way of satisfaction of the debt.
• Disposal of redeemable shares upon redemption.
• Disposal of an interest in shares in a company in consideration for a capital duty distribution.

Transfer of debts between group companies does not incur capital gains tax, even if the asset is a second-hand debt and therefore chargeable. The loss on the subsequent disposal is not allowed.

The transfer by a company of all its assets and liabilities to the parent company as a result of a merger by absorption under the Companies Act is not deemed a disposal by the parent of the shares held in the company concerned.

Brexit UK and reliefs

Finance Act 2019  ensures that the status quo is maintained in relation to certain corporation tax measures or reliefs in the event of a disorderly exit of the UK from the EU. Any reference to a company in the relevant legislation, which relate to groups of companies and chargeable gains, is a reference to a company which is resident in an EU Member State or an EEA state with which there is a double taxation treaty with Ireland.

Companies which are resident in the UK  continue to be regarded as being in a group of companies in the event of a disorderly Brexit, so that the reliefs  fpr

• company amalgamations by exchange of shares,
• company reconstructions and amalgamations
• transfers of trading stock within a group and
• replacement of business assets by members of a group

continue to apply in the case of such companies. In addition, it will ensure that an immediate tax charge will not arise solely as a result of the UK ceasing to be an EU Member State.