Revenue Note for Guidance

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Revenue Note for Guidance

587 Company reconstructions and amalgamations

Summary

This section adapts section 586 to the situation where, under a scheme of reconstruction or amalgamation, a company issues shares to the shareholders of another company in respect of and in proportion to their existing holdings in shares or debentures, those holdings being retained by them or cancelled. The transaction is treated as an exchange of shares and this comes within the rules applicable to a reorganisation of share capital so that the new holding is treated in the hands of the shareholder as if it were the original holding with no consequent charge to capital gains tax at the time of the exchange. The rule applies irrespective of whether or not the company issuing the new shares has, after the transaction, control of the other company. It does not apply, however, unless the transaction is for bona fide commercial reasons and not part of a tax avoidance scheme. The section also applies where debentures, loan stock or other similar securities are allotted or issued prior to 4 December 2002 and in certain limited circumstances where they are issued on or after that date. This section shall not apply where the company issuing the shares or debentures is an investment undertaking within the meaning of section 739B.

Details

Definitions

(1) A “scheme of reconstruction or amalgamation” is a scheme for the reconstruction of a company or companies or the amalgamation of 2 or more companies.

References to shares and debentures being retained include their being retained with altered rights or in an altered form whether as a result of reduction, consolidation, division or otherwise.

Reconstruction/amalgamation treated as exchange of shares

(2) A scheme of reconstruction or amalgamation involving the issue of shares by one company to the shareholders of another company in proportion to their existing shareholdings is treated as an exchange of shares. Thus, it comes under the same rule as an internal reorganisation of share capital. The shareholders are not therefore to be treated as if they had disposed of their old shares and acquired the new shares. Instead, the new shares are to be treated as in section 586, that is, as if they were acquired at the time the old shares were acquired and at the same cost. It is not a condition for the application of this provision that the scheme of reconstruction or amalgamation should result in the control of one company by the other company. (See subsection (4)(c) regarding the issue of debentures on or after 4 December 2002)

(3) The treatment in subsection (2) is applied to a company without share capital as if an “interest” in the company were the equivalent of shares.

Reconstruction/amalgamation must be for bona fide commercial reasons

(4)(a)&(b) The section does not apply to the issue of shares by a company under a scheme of reconstruction or amalgamation unless that scheme is effected for bona fide commercial reasons and not as part of a tax avoidance scheme. For this purpose, “shares” includes stock, debentures and the interests in a company with no share capital held by members of the company, and also options in relation to such “shares”.

Issue of debentures

(c) The section also applies where debentures, loan stock or other similar securities are allotted or issued prior to 4 December 2002 and in certain limited circumstances where they are issued on or after that date. The circumstances are where the debentures are issued on or after 4 December 2002—

  • pursuant to a written binding agreement made before that date;
  • by one company to another where both companies are members of the same group (within the meaning of section 616) throughout the period commencing one year before and ending one year after the date of issue; or
  • pursuant to a scheme or arrangement, the principal terms of which had been brought to the attention of the Revenue Commissioners and the Revenue Commissioners had acknowledged in writing before 4 December 2002, to the effect that the scheme or arrangement was a scheme of reconstruction and amalgamation.

Exclusion of investment undertakings

(d) The section shall not apply where the company issuing the shares or debentures is an investment undertaking within the meaning of section 739B.

Relevant Date: Finance Act 2021