Revenue Note for Guidance
This section provides for a number of additional rules of interpretation for the purposes of this Chapter. It also contains anti-avoidance measures to counter collusive arrangements whereby companies could make distributions to each other’s members and schemes whereby individuals could extract value from a company as capital as opposed to income.
(1) The term “new consideration” means consideration which is not provided out of the assets of a company. A capitalisation of profits is not new consideration. Share capital paid up out of a share premium account (itself representing new consideration) is treated as issued for new consideration, unless the premium has previously been taken into account in deciding that a return on shares represented a repayment of share capital and not a distribution.
The capital of a company consists of 100,000 ordinary €1 shares issued at a premium of 25 cent. The company transfers €25,000 to a share premium account and subsequently capitalises €75,000 out of its revenue reserves and then issues bonus shares, one for one.
The company now has capital of 200,000 €1 shares and these are paid up as to 62.50 cent per share by new consideration and as to 37.50 cent per share by capitalised company reserves.
If the company at a later date reduces its capital by 50 cent per share it would be treated as having made a distribution of 37.50 cent per share and as having repaid subscribed capital of 12.50 cent per share. The distribution is income in the hands of the shareholders.
(2)(a) Any consideration derived from the value of any share capital or security of a company or from voting or other rights in a company is not treated as new consideration unless it consists of —
(2)(b) Where the new consideration consists of a repayment of share capital or a repayment of the principal secured by a security or the giving up of such a right, the amount to be regarded as new consideration is not to exceed —
(2A) Any consideration derived from the share capital or security of a close company which is issued to another close company, pursuant to a share for share exchange, is not to be regarded as new consideration received by the other company in so far as it exceeds any new consideration received by the former company for the issue of the said share capital or security.
(3) Where arrangements exist between 2 or more companies to make distributions to each other’s members, all the parties concerned are treated as if anything done by one company has been done by any other.
(3A) Where arrangements are entered into by a member of a close company whereby shares or securities are disposed of by a member and the consideration for the disposal is met out of the assets of the company, then any amount received by the member from another close company in respect of the disposal is to be treated as a distribution.
(4) The meaning of “distribution” is extended in the case of companies which form a 90 per cent group. In relation to a company which is a member of a 90 per cent group (that is, a principal company and all its 90 per cent subsidiaries) the references in this Chapter and in section 137 to —
This provision does not apply where —
(5) A distribution is treated as having being made or other consideration treated as provided out of the assets of a company where the company bears the cost of the distribution.
(6) The term “share” includes stock and any other interest which a member may have in a company. This provision also applies to section 137.
(7) Issuing share capital as paid up includes the paying up of any share capital previously issued.
(8) The term “security” includes securities not creating or evidencing a charge on assets. Interest paid on (or other consideration given for the use of) money advanced without the issue of a security for that advance is treated as if the interest is paid (or other consideration is given) in respect of a security for the advance. The effect of this is that any loan capital (whether secured or not) is capable of being a security and the interest on an unsecured loan or a premium on its repayment could be a distribution (for example, under section 130(2)(d)(iii)(I)). This provision also applies to section 137.
(9) Where securities are issued at a discount or are issued subject to being repayable at a premium and are not quoted on a recognised stock exchange, then, unless the securities are issued on terms reasonably comparable with the terms of quoted securities, the principal secured is not to be taken to exceed the issue price.
(10) & (11) Where this Chapter applies to anything done in respect of a share or security, the Chapter applies not only to anything done to a person as the then holder, or the former holder, of the share or security, but also to anything done in pursuance of a right granted or offer made in respect of the share or security. This provision also applies to section 137.
Relevant Date: Finance Act 2019