Although each company in a group is a separate entity, tax law allows them to be treated as a unit for some taxation purposes. Losses and assets may be passed between group members on a tax neutral basis, subject to compliance with conditions. There are provisions which undo the benefit of exempt tax transfers, when a company which has obtained benefit, leaves the group, within a certain period.
See our separate chapters in relation to the use of losses and capital allowances incurred by companies. They may be used by the company to obtain relief from tax in a number of ways. Where the losses are not required for tax relief by the company which incurred them, that company may be able to transfer them for use to other companies within the same group.
Losses and excess capital allowances and charges may be surrendered from one group company to another. The companies must each be in the same group, for tax purposes. The definition of a group is narrower than in a company law context. This is to prevent the creation of artificial groups which are not so in substance and economic reality.
There are different percent shareholdings required for the various reliefs. For example, loss relief requires 75% shareholding.
One company must be (at least) a 90%/75%/50% plus subsidiary of the other or both must be 75% subsidiaries of a third company. The shareholding can be direct or indirect. There must be a beneficial shareholding. It must relate to 90%/75%/50% plus of the profits and gains available to the equity holders and 90%/75% /50% plus of the assets/ funds available on a winding up.
The entitlement to profits is based on accounting profits. The winding up test is made by reference to a notional winding up based on balance sheet values. Where there is no surplus an assumed loss of €100 is the basis of calculation.
Holdings by share dealing/investment companies do not qualify. There are anti-avoidance provisions. The parent must control the subsidiaries and there must not be other arrangements for transfer or exercise of control. Shareholding arrangements which seek artificially to create a group are countered so that there is deemed to be no group. Arrangements which temporarily satisfy the definitions are disregarded.
Formerly, the relief was restricted to Irish resident companies. However, EU anti-discrimination principles required that this be extended so that EU resident group members qualify. It also applies to companies’ resident in a country with which Ireland has a double taxation agreement (DTA). The shareholding for group purposes must be traced through companies’ resident in a EU/EEA/DTA country.
A 51% group is required in relation to relief in respect of group payments. Generally, income tax must be deducted on payments by companies. The group relief provides that it does not arise for payments between companies within a 51% group
Generally, companies are obliged to deduct tax at the standard rate on certain payments. These include annual interest (except those to certain regulated banks), royalties and annuities. There are certain exemptions where payments are made within the EU.
The obligation to withhold interest does not apply where a group with 51% shareholding exists. In order to avoid the deduction following conditions must be complied with:
- Both companies must be resident in an EEA state or state with double taxation treaty
- The paying company must be a subsidiary of the recipient company 51% or both must be 51% subsidiaries of another EEA state.
- EEA and EU only, not double tax treaty.
- EEA state with which Ireland has double tax treaty.
There is also relief from withholding income tax payments within the consortium.
A consortium relationship must exist. At least 5% capital must be owned by five or fewer companies’ resident in the EU with the lowest permissible shareholding being 5%. Shareholdings may be direct.
Where the relief applies either may pay interest gross to the other.
Transfer of assets
Assets can be transferred without capital gains tax between capital gains tax groups. A capital gains tax group consists of a company and its 75% subsidiaries. The definition is similar to that for a loss group. The relief applies on transfers between Irish resident companies and transfers between EU/EEA/DTA resident companies which are chargeable to corporation tax on capital gains for both parties.
No capital gains tax applies on transfers of assets between groups. They are deemed to be transferred at a price that makes no loss no gain. The asset is taken over with the same acquisition date as in the transferring member. Indexation applies from the date of the original acquisition. When the asset is ultimately transferred out of the group it is treated as when it was acquired by the original group member.
In order to avoid the obvious scope for transferring company property to a group company and then selling the company, certain anti-avoidance relief provisions apply.
Leaving the Group
Where the company leaves a group, any asset acquired by a group member is deemed to be sold and reacquired at the date acquired by the company which leaves the group at market value on the date of acquisition from the other group company.
Therefore the original gain which was deferred is chargeable on the company leaving the group. This applies to assets acquired within the previous ten years.
This does not apply where the company leaves with its holding company and a group structure remains intact as been the transferor and transferee company.
The relationship is also deemed to be maintained when there is a winding up of the company for bona fide commercial reasons and not for the purpose of tax avoidance.
A company may leave the group when it ceases to satisfy the definition of a group company under the tax legislation. This may happen in a range of circumstances. Regard must be had in particular to the requirement of tracing group status through EU/EEA/DTA companies. These are continuing obligations.
In some cases, the group company can also be held responsible.
The restriction does not apply where the company goes into bona fide liquidation for a bona fide commercial reason not part of a tax avoidance scheme.
There are exemptions for certain mergers carried out for bona fide reasons where tax avoidance is not the principal objective. Conditions apply. A non-group company must acquire an interest in all or part of the group business and one of more group companies must acquire an interest in the acquiring company or related companies.
Not less than 25% of the interest acquired by each must be in the form of ordinary share capital. The balance of the interest must be by way of share capital or debentures.
The value of the of the interest received by remaining group members must equate substantially to the value received by the nongroup company.
The consideration received by remaining group members (except for a relatively small part) is to be applied in acquiring an interest in the acquiring company or related companies.
Where a company ceases to be a member of a group within 10 years after its shares have been exchanged it is deemed to have disposed of them and reacquired them at market value at that earlier date.
If the tax has not been paid within six months of the due date, a group company may be charged within two years. Tax may be charged within two years to the principal company of the group and to any other group member in the two years ending on the date the gain accrued which previously owned or had an interest in the asset.
For the purpose of the former rollover relief, group companies were treated as a single or whole. Therefore, if another company repurchased the group, it may reinvest the asset. However, if the company which purchased a replacement asset leaves the group the gain crystallised.
A range of other anti-avoidance provisions apply to prevent abuse of the relief. Certain categories of assets do not qualify. These include in particular certain classes of shares and loans between group members.
Where a company ceases to be resident, it is deemed to dispose of all of its assets apart from assets which after the date are situated in the state and used by a branch in the state. The purpose is to prevent companies avoiding capital gains tax by disposing of assets while they are non-resident.