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

416 Limited right to profits or assets

Summary

This section is designed to prevent a possible abuse and applies where an equity holder whose rights in a distribution of profits or assets on a winding up are limited by reference to a specified amount or amounts. For example, an equity holder may be entitled to dividends up to a total of €5,000 but no more, or be entitled to all the assets up to €10,000 on a winding up but to only one per cent of the excess. Such arrangements could be used to manipulate the purported interests in a company for the purpose of qualifying for group relief. The section prevents such manipulation.

Example

Company A is set up as a leasing company, with assets €1,000,000 (paid for by means of a bank loan) which will be leased for a rental of €150,000 a year commencing towards the end of its first accounting period.

Company B holds 5 per cent of the shares in A, and is entitled to 100 per cent of the dividends paid by A up to a maximum of €5,000 and to 100 per cent of the assets on a winding up to a maximum of €10,000.

Company C holds 95 per cent of the shares in A and is entitled to 100 per cent of the excess of A’s dividends over €5,000 and on a winding up to 100 per cent of the assets over €10,000.

In Company A’s first accounting period there would be no (or minimal) profits and the assets (after deducting the bank loan) would also be little or nothing. B would be entitled to more than 75 per cent of such minimal profits or assets, or of any notional token amounts, and could therefore claim the surrender to it as group relief of A’s capital allowances, which might be 100 per cent of the cost of the assets. Yet when significant profits begin to accrue and A’s net asset position begins to improve, from the second accounting period onwards, company C would clearly have the major share.

The section prevents this by providing that, in calculating B’s interest, the limited rights attaching to its equity holding are to be ignored. Its dividend and assets entitlement would thus be taken to be the normal amount according to its shareholding, namely, 5 per cent.

Details

(1) & (2) The section applies to equity holders whose rights to dividends, interest or assets are limited in any way. Where the section applies, the percentage of profits and the percentage of assets to which a company is entitled shall be computed on the basis that all limitations on the rights of equity holders have been waived.

(3) If on a profit distribution, the percentage of profits determined in accordance with subsection (2)(a) is less than the percentage arrived at by computing the share of profits in accordance with section 414(1), the lower percentage is to be taken for the purposes of the 75 per cent test.

(4) Arrangements in relation to a notional winding up are provided for similar to those in subsection (3) in relation to a distribution of profits.

Relevant Date: Finance Act 2021