Approved Profit Sharing Schemes Income Tax

Approved Profit Sharing Schemes

[Approved for the purposes of Chapter 1, Part 17, TCA 1997 and Schedule 11 of that Act.] - Interaction with a Direct Demerger.

Reconstructions and Amalgamations

In Tax Briefing, Issue No. 48 (June 2002) Revenue detailed the appropriate tax relieving provisions in relation to company reconstructions and amalgamations. In brief, where shares are distributed in specie, the provisions of Sections 586 and 587, TCA 1997 do not apply, since both sections require that shares be issued. In addition, Section 535 TCA, 1997 (i.e., disposals where capital sums are derived from assets) does not apply since a distribution is chargeable as income in the hands of the recipient.

Direct Demergers

Arising from a number of queries received, Revenue would like to clarify the taxation position of a distribution in specie from a demerged company where shares have been appropriated to participants of an approved Profit Sharing Scheme and the Release Date for those shares has not been reached (at present three years from the Date of Appropriation).

The following treatment will apply in circumstances where a company makes a distribution to its shareholders consisting of shares in another company that is its 100% subsidiary.

Income Tax

No charge to income tax will arise where a distribution in specie is made by the company whose shares are used for the purposes of the scheme, where all of the following circumstances apply:

• The relevant scheme shares have been appropriated to participants of the scheme and the scheme shares have not reached their Release Date (at present three years from the Date of Appropriation)
• The scheme shares are retained by the Trustees until the Release Date
• The scheme is continued by the company and
• The distributed shares are retained by the Trustees and not passed to the participants until the Release Date.

Capital Gains Tax

Where this tax treatment applies, the original base cost for capital gains tax purposes must be apportioned over the original and distributed shares by reference to their market value at the date of distribution of the shares.

Application for approval for the foregoing tax treatment

Prior approval must be sought before the forgoing tax treatment can apply. Applications for approval may be submitted to Personal Income Tax, Direct Taxes Interpretation & International Division, Dublin Castle, Dublin 2 together with:

• A copy of the document covering the transaction
• An outline of the mechanism (step by step) by which the proposed transaction will take place
• A tax analysis of the transaction detailing the appropriate legislative provisions
• A copy of the Tax Information Sheet issued by the company covering the transaction which details how the shareholding percentages were revised and
• A synopsised diagrammatic representation of the group organisational structure pre and post restructure.

This practice is subject to review.