631 Transfer of assets generally

Summary

This section provides relief where a company transfers a trading operation carried on in the State to another company in return for securities in the second company. Such a transaction does not give rise to a corporation tax charge or, where appropriate, a capital gains tax charge, or to a balancing allowance or balancing charge in relation to capital allowances on any of the assets transferred.

The company which takes over the trading operation is regarded as having acquired the assets at their original cost to the transferring company and as having received any allowances that the transferring company received.

In order to ensure that the provisions are only applied to genuine transactions, the section provides that where the shares acquired in consideration for the trading operation are sold within 6 years, the cost of those shares for capital gains tax purposes is to be taken as the original cost of the assets transferred.

Details

(1)(a) The measures apply where a company transfers the whole of a trade carried on by it in the State to another company in return for the issue to the company of shares in that other company. In order to obtain relief both companies must be from the EU and the trade must be carried on within the State. In addition, the assets must be taken into use for trade purposes by the receiving company.

While the Directive obliges the reliefs to be given in the case of transactions which involve companies from two Member States, the reliefs are extended to transactions involving two companies from the EU. This means that transactions between two Irish companies are covered by the measure.

The reliefs also apply where a company transfers a part of its trade.

The rules to be applied for capital allowances purposes are —

• (2)(a) the disposal of the assets in the course of the transfer does not give rise to a balancing allowance or balancing charge, and
• (2)(b) the company receiving the assets gets the allowances which the receiving company would have got if it had continued to carry on the trade and use the assets for the trade. When the receiving company eventually sells the asset, it is to be subject to a balancing charge or allowance that would have arisen if all allowances made to the transferring company and all things done to or by that company relating to the asset had been made to or done to or by the receiving company.

(2)(c) Priority is given to section 400 where both this section and section 400 apply to a transaction. Section 400 applies to provide similar relief where a trade carried on by a company within the charge to Irish corporation tax becomes carried on by another company within that charge, provided that the trade (or a 75 per cent interest in it) is owned by the same persons before and after the transaction. If both sections apply to a transaction, section 400 applies to it and this section does not.

(3) Special capital gains tax rules are applied to a transfer. The transactions would, under normal capital gains tax rules, give rise to a charge to tax on the disposal of the assets. As provided for in the Directive that gain is not to be charged but the asset is taken over by the receiving company at its original cost to the transferring company. The specific rules are —

• the transfer is not to be treated as a disposal for capital gains tax purposes, and
• the receiving company is to be treated as having acquired the assets at the time and for the consideration at which they were acquired by the transferring company and as if all things done to or by the transferring company relating to the assets had been done to or by it. This means that the receiving company is taxed on the full gain on the asset by taking into account the original cost of the assets to the transferring company. Any capital allowances made, including capital allowances made to the transferring company, are taken into account in calculating a gain or loss.

(4)(a) Where the securities in the receiving company given to the transferring company in consideration for the transfer of the assets are sold by the transferring company within a period of 6 years after the transfer, the gain on disposal of the securities, referred to as “new assets”, is effectively calculated by comparing the disposal proceeds with the original cost of the transferred assets. This is achieved by apportioning to the securities in the receiving company the non-taxable gain arising to the transferring company.

The amount allowable on disposal of the shares, being the market value of the assets transferred, is to be reduced by the amount apportioned. If the securities are of different types the apportionment is to be carried out on the basis of the value of the different types at the time they were acquired by the transferring company.

(4)(b) If the shares are not disposed of until after the end of the 6 year period, the cost of the shares is taken to be the market value of the assets given on the transfer.

The reliefs are not to apply in certain circumstances. These are where immediately after the time of the transfer —

• (5)(a)(i) the assets are not used by the receiving company for the purpose of a trade carried on by it in the State,
• (5)(a)(ii) the receiving company would not be chargeable to tax on a disposal by it of the assets concerned. (The reason for this provision is that if Ireland’s taxing right in respect of a gain on disposal of the assets is lost, then a gain should be taxed at the time of transfer. The purpose of the Directive was to postpone a gain while at the same time protecting the taxing rights of Member States),
• (5)(a)(iii) the receiving company would not be liable to tax in respect of gains on assets, such as aircraft and shipping which are accorded special treatment under double taxation treaties (under double taxation treaties, a provision similar to that in the OECD Model Agreement is normally provided). The article concerned provides that profits from the operation of ships or aircraft in international traffic are to be taxed in the State in which the place of effective management is situated,
• (5)(b) where the receiving company and the transferring company jointly elect that the reliefs are not to apply (the election must be in writing and should be made to the inspector at the time at which the transferring company’s return is required to be made for the accounting period in which the transfer takes place).

Relevant Date: Finance Act 2021