Revenue Note for Guidance
This section defines for the purposes of section 412 what is meant by assets available to another company on a winding-up. The percentage to which one company is entitled of any assets of another company available for distribution to its equity holders on a winding-up is the percentage of the assets to which the first company would be entitled if the other company were to be wound up and on that winding-up the value of the net assets were equal to the excess (if any) of the balance sheet assets at the end of the accounting period over the total balance sheet liabilities. The total balance sheet liabilities is not to include the liabilities to the equity holders as equity holders. Where there is no such excess or if a balance sheet is not drawn up, a token figure of €100 is to be used: without such a provision, there would for this purpose be no basis on which to calculate the equity holders percentage entitlements. There is provision to prevent manipulation of the assets test by an artificial “parent” inflating a “subsidiary’s” assets and qualifying itself under the 75 per cent test by putting equity capital into the subsidiary which the subsidiary immediately lends back to the parent.
(1) The percentage to which one company is entitled of any assets of another company available to its equity holders on a winding up is the percentage which the first company would get if the other company were to be wound up and on the winding up the value of the net assets were equal to —
(2) Such a winding up is referred to as “the notional winding up”.
(3) Where an equity holder would receive an amount of assets an equity holder on a notional winding up and that amount would not, apart from this subsection, be treated as a distribution of assets, the amount nevertheless is to be treated as an amount to which the equity holder is entitled on the distribution of assets. An equity holder in this context includes a person who is a loan creditor of the company in respect of a loan which is not a normal commercial loan.
(4) Manipulation of the “assets” test laid down by section 412(1)(b) by a parent company increasing its shareholding in an associated company to 75 per cent at no real cost to itself is prevented. If a company, by subscribing for additional shares, increases its holding to 75 per cent of the total, it will become entitled to 75 per cent of the assets on a notional winding up, and thus pass the test under section 412(1)(b) and subsection (1)(a). The amount subscribed for the additional shares might, however, be returned to the parent company as a loan.
Were it not for the subsection the parent company would now be entitled to a 75 per cent interest in the subsidiary although it continues to have the cash it subscribed. The subsection provides that, in such a case, both the amount of the assets of the subsidiary company and the amount of those assets to which the parent company would be entitled on a notional winding up are to be reduced by the amount so returned.
Company B with assets worth €45,000 has issued share capital €40,000 of which company A holds €15,000. Company A subscribes for 60,000 additional shares for which it pays €60,000 and A now holds 75,000 of the 100,000 shares issued by B while the assets of B have increased to €105,000. B now returns the €60,000 to A as a loan. A has thus effectively got its money back but, on a winding up of B, it would still be entitled to 75 per cent of B’s assets. B’s assets, including the €60,000 on loan to A, are still €105,000 of which A’s 75 per cent share would be €78,750.
The effect of the subsection is that the €60,000 is to be deducted from the total assets (which will thus be reduced to the original €45,000) and from A’s share of the assets on a notional winding up (that is, a reduced amount of €18,750). As this is less than 75 per cent of €45,000 the test under section 412(1)(b) will not be satisfied.
Relevant Date: Finance Act 2019