Shaves give ownership rights in respect of companies. Shares quoted on a stock exchange are usually readily saleable and substantial information on the company is published on an ongoing basis.
Shares in a private company do not have a ready market. Indeed the definition of a private company requires that there are substantial restrictions on sale. See the section on company law and chapters on shareholder rights.
There are special capital gains tax rules in relation to shares. Some of these rules seek to prevent tax avoidance. Other rules allow for the fact that companies and groups of companies are commonly re-organised and amalgamated in a way which technically involves the sale or transfer of shares, but in reality replaces them with equivalent shares.
Reliefs exist, which in the appropriate circumstances, deem the new shares to represent the old shares and deem there to be no disposal and therefore no capital gains tax.
Receipts Usually Income
Most money received by shareholders in respect of their shareholding is deemed income and thereby subject to income tax, USC and levies. Transactions which appear to be capital gains transactions, in that they involve the purchase and sale of shares are usually deemed income transactions, where in substance the person’s shareholding is not substantially reduced or sold.
It is possible for a company to buy back its shares. Subject to compliance with certain conditions, capital gains tax treatment may apply. See generally our section on company tax in relation to when and to what extent share buybacks qualify for capital gains tax treatment ( as opposed to the less favourable income tax / levies/ USC treatment).
On a final winding up and distribution of a company’s assets, the shares are deemed to be disposed of by the shareholders. Monies received in these circumstances, are generally subject to capital gains tax provided that it is a genuine final winding up.
As with other assets, the original acquisition cost and enhancement expenditure on shares are deductible in the capital gains tax computation. Where shares are purchased, the acquisition cost is generally the purchase price. In transactions with connected persons, market price is deemed to apply.
Where shares are acquired directly from the company on allotment or subscription (i.e. where the shareholder pays money to the company in return for the shares) this payment is deemed the acquisition cost. Where a person is connected to the company (which will commonly be the case) and shares are issued in return for assets transferred to the company, the acquisition cost is the lower of the market value of the assets or the actual price paid.
There exists a good deal of anti-avoidance legislation designed to prevent parties artificially manufacturing losses by manipulating the rules relating to share issue. The famous McGrath case, which led to the enactment of general anti-avoidance legislation, involved the artificial creation of capital losses in respect of shares which were used to reduce genuine capital gains.
Shares of the same group or class have the same rights and are indistinguishable. However, they may be purchased cumulatively over different periods of time. When shares have been purchased on different occasions and later sold, there are certain presumptive rights which apply to determine which shares are deemed to have been sold. This is as important as it determines the acquisition cost which is deductible.
The general rule is first in first out. Therefore, the first shares sold are deemed to be those first acquired. There are exceptions to this rule. Where a person transfers shares and reacquires them or the same shares within four weeks, the shares are deemed to the same as those disposed of. The purpose of this legislation is to prevent persons realising losses on shares which have dropped in value but which the owner intends in substance to retain, by reacquiring the same or equivalent shares.
The anti-avoidance provisions apply if the reacquisition takes place within four weeks. The arrangement does not depend on any tax avoidance motivation. It applies generally. The rule also applies to re-acquisitions by spouses. A loss is only allowed as a deduction in relation to the sale of the shares which were reacquired. It is not available against other losses.
Where shares are reacquired in a re-organisation or amalgamation they are identified with the shares which they replace. There are special rules in relation to Business Expansion Scheme shares. There are presumptions in relation to the order in which they are deemed to be sold.
If a person uses his shareholding rights to effectively transfer value between shareholders, this is deemed a disposal (or more likely, a part disposal) triggering capital gains tax. If, for example, a shareholder arranges to change the rights attaching to his shares to the benefit of the rights attaching to those of another shareholder, this is equivalent to a transfer in value in respect of those shares. There is deemed to be a disposal subject to capital gains for the market value thereby transferred.
If a close company (see our corporation tax section) transfers assets at undervalue, the undervalue is apportioned to the shares of the company. The allowable cost of the shares is reduced by the amount of the undervalue apportioned. This prevents the creation of a loss by artificially disposing of assets at undervalue within the company.
Where assets are transferred between group members other than at market value, there is a so called depreciatory transaction. Losses allowable on the disposal of shares are reduced to the extent that the Inspector of Taxes considers just and reasonable. The allowable loss on the shares will not include the element attributable to the depreciatory transaction.
Dividend stripping applies in a similar fashion to restrict a loss that would otherwise arise. A company considering selling a subsidiary could make a substantial dividend which materially reduces the value of its shares. Where the shares are then transferred or disposed of, the rules limit the extent to which a loss may be created.
Gains arising to non-resident closely held companies (see corporation tax section) are attributable to Irish resident shareholders. Certain exemptions apply. This includes in particular an exemption where it can be shown that the disposal is undertaken for bona fides commercial reasons. Form part of an arrangement the main purpose of which is the avoidance of tax.
Relief Sale Shareholdings by Companies
The participation exemption is important as it gives Irish resident companies an exemption from capital gains for the disposal is of a substantial interest in another company. The exemption also applies to disposals of options to acquire the shares and convertible securities in respect of the shares.This assists islands offering as a holding company location for international companies.
The is for a holding company when it dispose of shares in a subsidiary in which it y hold, at least 5% of the share for at least 12 months in the previous two years. The company making the disposal must be entitled to at least 5% of the profits available on a distribution to ordinary equity shareholders and to the same proportion of assets on a winding up for such ordinary equity shareholder. Shares held by fellow group members of a 51% group are aggregated for the purpose of calculation of this holding.
The company whose shares are being disposed of must carry out a trade or trades and must be resident in the EU or a Double Tax Treaty State. Alternatively the business of the holding company subsidiaries and the company whose shares are being disposed of (effectively the group) as a whole may consist wholly or mainly of trading.
Exception to Relief
This does not apply to companies whose share value derives from land or minerals in the state or from exploration rights in respect of the seabed and subsoil or continental shelf . There is anti-avoidance legislation to prevent an artificial dilution of the value of land or minerals in a company so as to obtain the exemption by reducing the percentage value of the shares in the company which derived from land or minerals in the state.
Where money or assets are transferred to a company prior to the disposal of shares in that company in order that the value is derived mainly from those assets, they are not to be taken into account and determine whether the value of the shares disposed of is derived from those assets. This applies to the disposals after 19th October 2017.
It does not apply to a disposal which might be otherwise exempt because it is not subject to capital gains tax e.g. trading transaction. It does not apply to transactions which are deemed to take place at no gain or loss.
Finance Act 2014 provides that the participation exemption does not apply to certain disposals within the scope of anti-avoidance legislation applicable to disposals by foreign resident companies, which would be close companies if they were resident in Ireland. This imputes gains of non-resident companies to Irish resident and domiciled participators as if the gain arose to them. I