Revenue Note for Guidance

The content shown on this page is a Note for Guidance produced by the Irish Revenue Commissioners. To view the section of legislation to which the Note for Guidance applies, click the link below:

Revenue Note for Guidance

CHAPTER 2

Meaning of distribution

Overview

This Chapter provides a meaning for the term “distribution” for the purposes of the Corporation Tax Acts. It is to be noted that the meaning of “distribution” is extended by sections 436, 436A and 437 in relation to close companies. The Chapter also provides in sections 133 and 134 for the limitation of the meaning of “distribution” in certain circumstances.

130 Matters to be treated as distributions

Summary

This section gives the meaning of the term “distribution” for the purposes of the Corporation Tax Acts. Broadly, a distribution comprises any dividend to a shareholder. The scope of the definition is widened to include a variety of other transactions or payments which are treated as distributions for corporation tax purposes. The meaning of the expression is further extended, in relation to close companies, by sections 436, 436A and 437 and, in relation to shares issued in place of dividends, by section 816. It is to be noted that the definition also applies for the purpose of income tax under Schedule F (see section 20).

Details

Distributions

(1) The term “distribution” is to be given the meaning laid down in this Chapter and in sections 436, 436A and 437 which contain special provisions in relation to close companies and in section 816(2)(b) in relation to shares issued in place of dividends. The definition does not include distributions made in respect of share capital on the winding up of a company.

(2) The term “distribution” means —

  • any dividend paid by a company, including a capital dividend,
  • any other distribution out of the company’s assets in respect of shares in the company except any part of the distribution which represents a repayment of capital or is equal in amount or value to any new consideration received by the company in respect of the distribution,
  • any amount in respect of the redemption or part redemption of bonus securities which is not referable to new consideration,
  • any interest or other amount paid out of the assets of a company in respect of —
    • bonus securities issued on or after 27 November, 1975,
    • unquoted securities convertible directly or indirectly into shares of the company and unquoted securities with rights to receive shares or securities of the company,
    • securities the consideration for which (that is, the interest given by the company for the use of the principal) is to any extent dependent on the company’s results or is at more than a reasonable commercial rate (in the latter case the excess interest over the reasonable commercial rate is a distribution) – this provision does not apply to certain securities issued in the course of securitisation transactions to which section 110 applies (see note to that section),
    • securities issued by a company and held by a non-resident company where the company is a 75 per cent subsidiary of the non-resident company,
    • securities issued by a company and held by a non-resident company where both companies are 75 per cent subsidiaries of a third company which is not resident in the State,
    • except where 90 per cent or more of the share capital of the company which issued the securities is directly owned by a resident company, securities issued by a company and held by a non-resident company where both companies are 75 per cent subsidiaries of a third company which is resident in the State,
    • In relation to the last three categories of securities, the application of this provision can be disapplied in certain circumstances (see notes to sections 452 and 845A for details),
    • securities connected with shares in the company (that is, where the rights attaching to either the securities or the shares, and in particular the conditions on which the securities or the shares can be transferred, are such that it is necessary or advantageous that the securities and the shares be held, disposed of or acquired together), or
  • any amount treated as a distribution by subsection (3) and any amount in respect of a bonus issue followed by a repayment of share capital as described in section 131.
  • any qualifying amount, (defined in subsection (2C)) which is paid to a beneficiary of an Employee Share Ownership Trust (ESOT), where that ESOT is linked to an Approved Profit Sharing Scheme (APPS).

Interest on “Ratchet Loans”

(2A) Interest is not treated as a distribution where it is paid on a “ratchet loan” i.e. a loan which provides higher levels of interest where the borrowing company’s profits fall and lower levels of interest where the borrowing company’s profits rise. These “ratchet loans” are commercial in nature and are not a mechanism to disguise an equity investment as a loan.

Interest paid to associated companies resident in the EU

(2B) Interest is not treated as a distribution where it is paid to a company referred to in subsection (2)(d)(iv) which company is a resident of another EU Member State or the United Kingdom. The option contained in sections 452 and 845A for certain companies to elect for the non-application of subsection (2)(d)(iv) in certain circumstances is retained.

“Qualifying Amount”

(2C)Qualifying amount” is defined as a payment made out of dividends received by the ESOT on their holding of securities in a chargeable period. The two general savers in section 519(6) and paragraph 13(4) of Schedule 12 relating to the order in which funds are utilised are disapplied for the purposes of this calculation. Certain deductions are made to the amount of dividend income received in determining how much is available to be paid out as a “qualifying amount”. These are —

  1. any sum expended meeting expenses of the trust,
  2. any interest paid on borrowings of the trust,
  3. any amount paid to the personal representative of a deceased beneficiary of the trust,
  4. any amount expended on the repayment of borrowings. Included in this is any amount of borrowings which could have been repaid but was not. The trust is allowed to maintain the level of borrowings necessary to comply with paragraph 11(2B)(d) or paragraph 11A(5)(d) of Schedule 12), and
  5. any amount spent on the acquisition of shares. This includes the amount of any shares which could have been acquired at market value (within the meaning of section 548) but were not.

Transfer of assets and liabilities

(3) & (4) 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 of the transfer exceeds the amount or value of any new consideration given is treated as a distribution. However, such transfers between 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 the EU, a Member State of the European Economic Area with which Ireland has a tax treaty or the United Kingdom. For this purpose, a company is a subsidiary of another if it is a 51 per cent subsidiary of that other company. However, in applying the 51 per cent subsidiary rules (section 9), shares held directly or indirectly by a share dealing company and shares held directly or indirectly by a company in a non-resident company are excluded.

Exceptions

(5) A transfer of assets (other than cash) or liabilities between 2 companies is not treated as a distribution by virtue of subsection (2)(b) or (3) if both companies are resident in the State, neither is a 51 per cent subsidiary of a non-resident company and the companies are not under common control either at the time of the transfer or as a result of it. Companies are under common control if they are under the control of the same person or persons and for this purpose the definition of “control” in section 11 applies.

Relevant Date: Finance Act 2020