Share Redemption

Buyback and Redemption of Shares

Formerly, there were severe restrictions on a company purchasing and redeeming its own shares. Tax and company legislation was introduced in 1990 to facilitate the purchase back or redemption by a company of its own shares. A redemption is where the company buys back and cancels the share without acquiring it.

Companies have always been able to issue and redeem preference shares. The 1990 legislation allows for redeemable ordinary shares, subject to certain conditions. Sums paid on the redemption of shares are deemed a distribution to the extent that they exceed the amount originally subscribed for the share.

Significant restrictions still exist on the company law and tax treatment of buy back and redemptions. However provided the purchase is undertaken from distributable profits and provided certain procedures, including approval by the shareholders (with the provision of a right of objection by dissenting shareholders) the procedure can be valid for from a company law perspective.

Income Tax Treatment Presumed

Generally the purchase of shares is treated as a distribution subject to income tax where the purchase price exceeds the amount originally subscribed for those shares. When a capital type transaction is treated as a distribution, dividend withholding tax must be withheld.

A redemption or re-purchase of shares for an amount greater than that originally subscribed is deemed income, subject to (potentially higher rate) income tax. This legislation is part of a series of anti-avoidance legislation which seeks to tax most monies or benefits derived from shares as a dividends, unless it is a redemption of the original share investment in the company.

Where bonus shares which have been created on capitalisation of profits are redeemed, there is deemed to be to be a distribution, subject to income tax. . Where there is a redemption of shares followed by a subsequent bonus issue of shares, the bonus issue itself may be taxed as a distribution.

Where shares have been issued and a bonus issue of shares follows the redemption of the original shares, there will be a deemed distribution even in respect of the original subscription, because the bonus shares have effectively replaced them

Relief by CGT Treatment

Taxation legislation allows for certain sales of shares by shareholders to be treated as capital gains, rather than income transactions. This is more beneficial to the shareholder by reason of the lower tax rates.

The conditions for capital gains tax treatment, are as follows:
• The company is an unquoted trading company or the holding company for such company;
• The buyback is for the purpose of a trade;
• Shareholder is resident and ordinarily resident;
• Shares have been held for five years (three years in an approved profit-sharing scheme);
• Shareholders and persons connected have reduced their shareholding to at least 75% of that of the pre-purchase level;
• Shareholders and associates are no longer connected with the company after the buyback

The repurchase must be from distributable profits. The rules also apply to quoted companies subject to certain additional conditions.

Permitted Purposes

There is a requirement that the company be a trading company which requires that the business consist wholly or mainly of the carrying on of trades. It may be a holding company of such a company. Trade does not include dealing in shares, other financial instruments or in property.

It is a condition of the relief that there be a benefit to the company’s trade or that the purpose of the buy back is to pay gift or inheritance tax. The conditions are relaxed in the latter case.

The Revenue has given guidance on what will be regarded as a trade benefit. It may include the purchase of a retiring shareholder.

Reduction

There must be at least a 25% reduction in shareholding as a consequence of the buyback. The reduction must apply in respect of the person whose shares are purchased and connected persons. The 25% reduction must apply both to the nominal holding and to the overall entitlement to profits on a distribution. Where shares are held in several group companies, the reduction in shareholding and profit must be applied to the whole group.

The shareholder must not be connected with the company after the sale, or with any group company. A person is deemed connected where he is directly or indirectly entitled to 30% of the loan or share capital or the voting power of the company or if he is entitled to receive more than 30% of the assets of the company on a winding up. Associates include a wide degree of relatives as well as trusts and trustees of which the person is a beneficiary and associated and connected companies.

Inheritance Tax Use

Where the buyback is to facilitate the payment of gift or inheritance tax the conditions are less onerous. The requirements in respect of residence, period of ownership, reduction and severance of connection do not apply.

The relief will apply where the sale proceeds or a significant part are used to discharge inheritance or gift tax or a debt incurred to discharge such liabilities. There is a test by which hardship must be shown, in the absence of purchase or redemption.

Where funds are used to pay capital acquisitions tax this must be done within four months of the taxation date. The CAT exemption requires use in relation to discharging CAT on the inheritance of the shares. It must be shown that the tax cannot be discharged without selling the shares, other than by incurring undue hardship.

Returns

When shares are purchased back returns must be made by the company. These are done at the same time as the normal returns.

A person connected with the company must inform the Revenue within 60 days of becoming aware of any scheme or arrangement by which the capital gains treatment may not apply.