Revenue Note for Guidance

589 Shares in close company transferring assets at undervalue

Summary

This section covers the situation where a close company (defined in section 5 by reference to section 430), or a company which would be a close company if resident in the State, transfers an asset to any person other than by means of an arm’s length bargain and for a price which is less than its market value. In any such case the difference between the consideration received for the asset and its market value is to be apportioned among the issued shares of the company so that, in the event of a disposal of any of those shares, the cost of acquisition of those shares is to be reduced by the proportionate part of that difference.

Details

Apportionment of difference to shares

(1) Where a close company transfers an asset at undervalue, otherwise than by means of a bargain made at arm’s length, the amount by which the consideration for the disposal of the asset is less than its market value is to be apportioned over the issued shares of the company.

Base cost adjustment

(2) Any amount so apportioned to shares is to be excluded from the expenditure allowed to be deducted in computing a gain on any disposal of the shares by a person owning them at the time of the transfer of the asset.

Shareholder is itself a close company

(3) To deal with the position where a shareholder affected is itself a close company, the amount apportioned to that close company under subsection (1) is to be apportioned among the issued share capital of that company and, in the event of a disposal of any of that share capital, the holders are to be treated in accordance with subsection (2). Essentially, this provision looks through a close company which is a shareholder of another close company so that the adjustments provided by the section carry through to the shareholders of that company and so on through any number of close companies if necessary.

Application to non-resident companies

(4) The section also applies to non-resident companies which if resident in the State would be close companies.

Example

A buys 200 ordinary shares in a close company for €5,000 (1,000 ordinary shares is the issued share capital of the company). Some time later the company sells to a connected person for €10,000 a chargeable asset the value of which is €25,000. The sale is treated as being made for €25,000 and the company is charged accordingly. When A later sells her shares for €12,000, her chargeable gain (disregarding any indexation relief due under section 556) is computed as follows —

Sale proceeds		€12,000
Deduct: Cost of shares	€5,000

Less undervalue of shares

€200

×€15,000

€1,000

€3,000

Adjusted cost

€2,000

Chargeable gain

€10,000

Relevant Date: Finance Act 2021