Dividends

Dividend Income

A dividend is usually declared by the directors and confirmed by the shareholders. Under companies law, it may only be declared out of earned profits. It is not deductible for tax as it is a distribution of profit out of the company to the shareholders.

Generally companies must withhold dividend withholding tax on dividends paid at the rate of 25%. A return of dividends withholding tax must be made to Revenue monthly where applicable. Finance Act 2019 increased the rate of dividend withholding tax from the standard rate of income tax (20%) to a rate of 25% and increases the rate specified in section 153 in a similar manner.

An Irish resident  shareholder who receives a dividend is liable to income tax. This is payable as part of his or her annual tax liability and is included in  the preliminary tax and file and tax payment obligations.

The dividend withholding tax is a credit towards the final liability. Depending on the taxpayer’s marginal rate and the impact of levies the may be an effective tax rate of over 50% on the dividend received.

Company Recipients

Where an Irish resident company receives a distribution from another Irish resident company, no dividend withholding tax or tax liability arises. In effect, tax is only charged once there is payment to a personal shareholder.

Apart from tax on dividends, there is a surcharge on dividends/distributions and other passive income which is not distributed to personal shareholders within 18 months of the tax period. See the chapter on close companies.

Anti-avoidance provisions re-characterise interest as a distribution in certain circumstances. There is  an exception from this treatment where the payment is to a company which is a resident of another EU Member State. Finance Act 2019 amends the provision to maintain this treatment for companies that are resident in the United Kingdom, in the event of a disorderly exit of the UK from the EU.

Where a company transfers assets or liabilities to its members or vice versa, the amount by which the market value of the amount or benefit received by the member exceeds the amount or value of any new consideration given by the member, is treated as a distribution. However, such transfers between Irish resident companies are not treated as distributions where one company is a subsidiary of the other or both are subsidiaries of another company which is resident in a “relevant Member State.” Finance Act 2019 ensures that the current treatment continues to apply to Irish subsidiaries of UK-resident companies, in the event of a disorderly exit of the UK from the EU.

Distributions

For tax purposes, dividends are defined more widely than the commonly understood meaning. Distributions comprise any transfer of value to shareholders and connected persons and are also taxed in the same manner as dividends. The term distribution  embraces dividends and a much wider range of benefits and transfers from the company to shareholders and others.

A dividend is normally paid in cash. However, a distribution of assets may also be a dividend or distribution. There is a dividend to the extent of the book value and distribution to the further extent of the market value.

There is a distribution to the extent that there is any inequality in the value of assets or liabilities transferred by a company to its shareholders or by the  shareholders to company. Accordingly, if the company over pays for an asset purchase from a shareholder there is a distribution to the extent of the overpayment. Equally there is a distribution to the extent of any  undervaluation on the sale or transfer of an asset by the company to the shareholder.

The principle can also apply on transfers between connected companies which have substantially the same shareholders. The is a distribution to the extent of undervalue or overvalue.

Capital Transactions as Income

A repayment of share capital  is not a dividend to the extent of the original subscription of capital and share premium. Any excess over the nominal value of the capital and share premium paid is treated as a distribution.

The repurchase of shares by a company to the extent of the original subscription of nominal capital and share  premium is not treated as a distribution. Equally other mechanisms by which the share capital is redeemed and cancelled is not a dividend to the extent of the original subscription of nominal capital and share premium.

When new consideration is received by the company, which is not directly or indirectly provided by the company, in return for what would otherwise be a distribution, then there is not a a distribution for tax purposes. There would be new consideration where shares are exchanged for existing shares with no adjustment in economic interest.

A bonus share or stock dividend issue by the company to an existing shareholder in proportion to its shares involving no payment is not a distribution. There is a nominal change only in the extent of the shareholders economic interests of the company. For the same reason, share capital paid out of the share premium account will not be a distribution where it is converting the account to capital.

Where there is a bonus share by capitalisation of reserves (undistributed  income) and the same is redeemed the redemption is deemed  to be a distribution to the extent that it is not a redemption of the original shares or there is no new consideration.

The same treatment applies when shares are redeemed, and bonus shares are issued by way of capitalisation of reserves thereby replacing the redeemed shares. The redemption is deemed to be distribution taxable as income. Certain limited exceptions apply.

Anti-Avoidance

There is a range of anti-avoidance legislation which seeks to prevent arrangements in relation to share capital being treated artificially as capital rather than income transactions to take advantage of the lower capital gains tax rates.

This is aimed in particular at arrangements between companies or collusion which seeks to restructure share capital so as to artificially deem there to be new consideration. There is deemed to be no new consideration on a share swap under certain conditions.

Where arrangements exist between two companies to make distributions to each other’s shareholders, the arrangements are looked through and treated as if there are done within a single company. Where a shareholder in a close company or persons connected with it enter arrangements with another close company by which it disposes of its shares or securities in the first company and the payment is made directly and indirectly from the assets of the first company what is received is treated as a distribution to the shareholder.

Group

The distribution and deemed distribution provisions does not apply where the companies are in a group. Generally, assets may be passed within the group on a tax neutral basis. However, where two companies are controlled by the same parties but are not part of a group the distribution principles apply to transfers that undervalue or overvalue between the companies.

The transfer of non-cash assets between companies

• which are not under common control either before or as a result of the transfer
•  both resident in the state and are not owned by a non-resident company

is not treated as distribution.

Loans in the nature of shares

Loans whose rate of return varies with the financial/trading results of the company are classified as giving rise to a distribution rather than interest. This does not apply to loan instruments /securities which vary in simple way linked to repayment risk with reference to the company’s trading results and which represents a reasonable commercial return.

Where the recipient is a company subject to Irish corporation tax, the interest is treated as such and is not treated as distribution. This causes it to lose the exemption from corporation tax for dividend income received by an Irish resident company from an Irish resident company.

There is a distribution where there is a  payment other than a dividend paid in a winding up, the cost of which is borne by the company concerned unless it is a pure repayment of capital, or it is in return for new consideration. This seeks to treat as income arrangements which is take the form of capital repayments but are in substance payments of income earned by the company.

EU Companies

Where securities are held by a non-resident 75% shareholding parent or fellow subsidiary 90% of which is owned by an Irish resident company, interest is subject to distribution treatment. A double taxation agreement may require the income from the security to be treated as a dividend depending on its wording.

There are conditions under which a company paying interest on securities may opt to have the interest not treated as a dividend. It must be

• payable in the ordinary course of trade and deductible as trading expense
• be payable to accompany resident in a EU state other than Ireland or a tax treaty country.

Interest paid to 75% parents and associated companies may be treated as distributions in the case of yearly interest. This, however, may require deduction of standard rate income tax on the interest.

Finance Act 2019 amends the provision to maintain this treatment for companies that are resident in the United Kingdom, in the event of a disorderly exit of the UK from the EU.

Where a company transfers assets or liabilities to its members or vice versa, the amount by which the market value of the amount or benefit received by the member exceeds the amount or value of any new consideration given by the member, is treated as a distribution. However, such transfers between Irish resident companies are not treated as distributions where one company is a subsidiary of the other or both are subsidiaries of another company which is resident in a “relevant Member State.” Finance Act 2019 ensures that the current treatment continues to apply to Irish subsidiaries of UK-resident companies in the event of a disorderly exit of the UK from the EU.