Revenue Note for Guidance

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Revenue Note for Guidance

583 Capital distributions by companies

Summary

This section provides the general rule that where a shareholder receives a capital distribution from a company, other than a distribution of certain new shares dealt with in section 584, the distribution is treated as if for its value the shareholder had disposed of part of his/her holding of shares. A “capital distribution” is defined as any distribution from a company (including a distribution on a winding-up) other than a distribution which is treated as income in the hands of the recipient, as, for example, an option to take shares instead of a cash dividend.

Most distributions from Irish resident companies, including capital distributions, are now subject to income tax under the rules of Schedule F (see section 20). However, distributions made in a winding-up of a company are not within the charge to income tax (see section 130(1)). For capital gains tax purposes, capital distributions arise mainly on the winding-up of a company and also in the context of the disposal of rights issues (see section 584(8)) and the provisions dealing with the buy back by a company of its own shares (see Chapter 9 of Part 6).

Details

(1) The term “capital distribution” means any distribution from a company, including a distribution in the course of a winding-up, whether it is in money or money’s worth. A distribution which is chargeable to income tax is not to be regarded as a capital distribution.

(2) Where a person receives or becomes entitled to receive in respect of shares in a company a capital distribution from the company (other than a distribution of new shares for old shares dealt with under section 584), the person is to be treated for capital gains tax purposes as if he/she had made a disposal of an interest in the shares in consideration for the value of the capital distribution made by the company.

Example

A shareholder has 1000 €1 shares in a company which cost her €2,000. The company which is being wound up makes a capital distribution of 25c per share. The chargeable gain is computed by reference to the sum of €250 less a proportion of the cost of the shares (in other words the normal part disposal rules set out in section 557 apply). That proportion is calculated by reference to the value of the distribution and the current value of the shares (say €2,750) thus —

€250

2,000 ×


= €167

€250 + €2,750

Disregarding indexation under section 556, the chargeable gain on the part disposal is €83 (€250 less €167) and, in the event of a future disposal of the shares (including a further capital distribution), the balance of the cost to be allowed will be €1,833 (€2,000 less €167).

Relevant Date: Finance Act 2021