There are reliefs from capital gains tax for amalgamations and reconstructions of companies. There are similar although slightly different reliefs for a stamp duty.
There are also reliefs from CGT for mergers and acquisitions deriving from EU legislaiton. This extends to EEA companies and to the UK.
Unlike the position in the UK there is no relief available by which the shareholders or a company may partition various businesses between them. This would fail the test that the shareholders must retain the same portions in each company as part of the reorganisation. By concession, there is a limited relief used for family businesses, partition of family businesses.
Amalgamations and Reconstructions
Where there is a merger, the shareholders of on company may receive substituted shares in a new merged entity in exchange for their shares. It may involve one company transfer its assets to a new company in return for the issue of shares in that new company to its shareholders (thereby affecting an amalgamation).
Reconstructions involve a splitting of companies. They commonly involve taking distinct businesses within a particular company and carving them as into another company.
Subject to certain condition, the transfers will not incur capital gains tax. The key condition is that the same parties must ultimately control the new companies as the old companies and in the same proportions.
At shareholder level there is a share for a share transaction. The shareholders in the original companies may exchange their shares for shares in the new company. This would otherwise trigger capital gains tax but for the relief..
In parallel to the reliefs that exist at company level and for stamp duty when companies are re-organised, there exist reliefs which may be available, when shareholdings are re-organised. The essence of the relief is that new shares obtained as a result of the re-organisation are deemed to be the old shares.
Although the ownership of shares is transferred (or swapped), there is no capital gain. The new shares are deemed to replace the old shares and have the original acquisition cost.
In some re-organisations, there may be some element of payment, as well as share swap. In this case, there is a partial capital gains, as to the extent of monies received. The element of the price which consists of replacement shares is not deemed disposed of, and qualifies for the above treatment.
The rules in relation to re-organisations, reconstructions and amalgamations contain many strict conditions. The Revenue authorities are keen to ensure that such rules are not exploited to engineer transactions which appear to be re-organisations but are in fact disguised sales to third parties. It is a general rule requirement that after any such re-organisation or reconstruction, that the existing shareholders own the same economic entity in the same proportions.
There are a number of types of re-organisations. An exchange of old shares for new shares may take place for example where a new holding company is inserted between the shareholders and the company concerned. In this case, the shareholders swap their shares in the company for shares in the holding company and the holding company in turn obtains the shares in the new company.
There is no economic change and capital gains tax relief will generally be available in a simple case like this.If any element of payment is received there is a partial capital gain. On the other hand if a payment is paid inwards this is deemed to be enhancement expenditure.
Bonus Shares and Rights Issues
A re-organisation of share capital includes where a person receives shares or debentures in a company in respect of, or in proportion to his existing shareholding. This would include a bonus or rights issue of shares, the exchange of one type of shares for another and the exchange of debentures or preference shares for shares.
A bonus shares is where new shares are issued without the shareholders providing new money. Generally a bonus share involves capitalization of reserves e.g. undistributed profits as there is no economic change. This will generally be deemed a re-organisation so that the new increased shareholding as a whole is deemed equivalent to the old shareholding and has the same base cost.
A rights issue is where shares are issued in return for new capital. A rights issue may qualify as a re-organisation, provided that is in fact taken up by the shareholders as a whole.Where some shareholders do not take up the rights issue and sell their rights to subscribe for new shares to third parties, they are deemed to part dispose of their shares. The new shares which are issued are deemed to form part of the existing holding and the price paid is deemed enhancement expenditure. There is no disposal to the figure in capital gains tax of the original holding.
A reconstruction is where the same shareholders, debenture holders etc. in one company rearrange their rights so that they own equivalent rights in a new entity or a new entity which changed internal re-organisation. Relief may be available when shares in a company are swapped for other shares in the same company, provided the exchange is proportionate.
Persons might sell shares and in return, receive debentures or loan. Formerly the relief existed when shares were swapped for loans or debentures. Prior to 2003, this provided a mechanism on a share sale, to defer capital gains tax for the seller. The relief is no longer available when shares are swapped for loans or debentures. This was part of a range of “reliefs” which were deemed overly generous and were abolished upon reduction of the capital gains tax rate to 20%.
The reliefs are available in respect of the entire share capital of the company. Shares may be swapped for shares and debentures (i.e. debt) may be swapped for debentures. However, for the reasons set out above, the relief is restricted where shares are swapped for debentures.
An amalgamation may take place by either the shareholders of one company swapping their shares in the company for shares in the new company and that new company either becoming the holding company of the old company or alternatively receiving the undertaking or underlying business assets of the company. The first relief is a so called share for share exchange. The second is a so called share for undertaking exchange.
An amalgamation is where two companies merge their business into a single company. Typically the shareholders in one company transfer their shares to the other company and receive shares in the other company. Alternatively, the shareholders in both companies transfer their shares to a third new company and receive shares in that company.
Relief is available for qualifying company amalgamations. Provided certain conditions are complied with and the shareholders have proportionately the same economic interests in the new amalgamated entity as the old companies, then the relief may be available.
The Irish provisions do not provide for a so called demerger. This would take place where a company holds two businesses and it is desired to partition those businesses between the shareholders. In other jurisdictions, it is possible to create two new companies, with some shareholders owning a company holding one business and the other shareholders holding shares in another company owning the other business.
Conditions for Relief and Anti-Avoidance
The reliefs for reconstruction and amalgamations apply in broad terms, where there is a bona fide scheme for relief for commercial reasons where the same shareholders own the same underlying assets in the same proportions before and after. There must be substantial identity of ownership, before and afterwards. All of the various reliefs require that they be bona fide for good commercial reasons and not for the purpose of avoidance of tax.
The legislation prevents reconstruction and amalgamation relief being used as a method of selling shares free of capital gains tax. Where a company leaves a group within 10 years of a re-organisation, capital gains tax will be chargeable on the principal group in the company. The company concerned is deemed to have sold and immediately reacquired the shares in the subsidiary prior to the earlier occasion when the relief was granted.
In the absence of this rule, it would be possible for a company to sell a group company by re-organising its shareholdings and then transferring a subsidiary company to an outsider. The provisions deem the original holder of the shares to have disposed of its shareholding in the company on the date that it leaves the group.
Assessed on Others
If the tax assessed is not paid within six months by the company primarily liable, it may be assessed on other group companies subject to certain conditions. The company primarily liable is that which disposed of the shares on the earlier occasion. The provision applies where a company transfers shares in another company in the course of a re-organisation or amalgamation and that latter company later leaves the groups.
Where a company leaves a group within 10 years of a amalgamation or reconstruction anti-avoidance legislation deems the shares in it to be sold and reacquired thereby triggering the gain that arose on reconstruction or amalgamation. The tax may be assessed on the company which made the transfer. If not paid, it may be assessed within two years on the principal company in the group or the company which have the shares in the subsidiary which left the group. The purpose of this legislation is to avoid the abuse of amalgamations and reconstruction reliefs.
The relief provides that if an asset has been transferred inter group and the second company leaves the group, it is treated as if it had sold and reacquired the asset at market value immediately after acquisition of the asset. For the purpose of determining the tax payable on the deemed sale and acquisition, it is treated as tax for the accounting period of the chargeable company in which it ceases to be a member of the group.
On a transfer of assets and liabilities to a successor company pursuant to a merger or division, the tax payment filing and reporting obligations of the transferor company devolve on to the successor company or companies where there has been a merger or division in accordance with the Companies Act.
An appeal made by the transferor company may be deemed an appeal made by the successor or company. A right of appeal in relation to an appealable matter transfers to the successor company.
A repayment may be made to a successor company where a valid claim is made in respect of tax overpaid by the transferor company following a merger or division. Where there is one or more successor companies, the repayment is made on a just and reasonable basis.
Must be Bona Fide
The deferral of capital gains tax as part of the reconstruction or amalgamation had not provided for an exception in respect of bona fide plan or action. The Finance Act 2015 makes an anti-avoidance provision to counteract arrangements where the relief is used as part of a scheme to avoid capital gains tax on the ultimate disposal of assets being transferred.
The relief will applies only where it is shown that the reconstruction or amalgamation is efected for bona fide commercial reasons and does not form part of an arrangement, the main purpose or one of the main purposes of which is the avoidance of tax liability.
The provision may apply where a trade within a group is transferred to a new company and then sold. Revenue guidance may confirm.
EU Cross-Border Mergers Directive
Irish Company Law permits mergers under the EU cross-border mergers directive. The company may be merged into its parent without going into liquidation and transferring its assets. FA 2012 provides, that this is not to be treated as a disposal by the parent company of the share capital held in the subsidiary. The merger is tax free for the parent in any event.
In determining whether one company is a 75 per cent subsidiary of another company the other company shall be treated as not being the owner of—
- any share capital which it owns directly in a company if a profit on a sale of the shares would be treated as a trading receipt of its trade,
- any share capital which it owns indirectly and which is owned directly by a company for which a profit on the sale of the shares would be a trading receipt, or
- any share capital which it owns directly or indirectly in a company that is not a company which, by virtue of the law of a relevant territory, is resident for the purposes of tax in such a relevant territory,
The the first-mentioned company shall not be treated as a 75 per cent subsidiary of the other company unless—
- that other company, by virtue of the law of a relevant territory, is resident for the purposes of tax in such a relevant territory, or
- the principal class of shares of that other company or, where the company is a 75 per cent subsidiary of another company, the principal class of shares of that other company, is substantially and regularly traded on a stock exchange in the State, on one or more than one recognised stock exchange in a relevant territory or territories or on such other stock exchange as may be approved of by the Minister for Finance
Brexit UK and reliefs
Finance Act 2019 seeks to ensure 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 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 this country has a double taxation treaty. This ensures that companies which are resident in the UK continue to be regarded as being in a group of companies in the event of a Brexit.
The following reliefs are preserved
- 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)
An immediate tax charge will not arise solely as a result of the UK ceasing to be an EU Member State.
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