Revenue Note for Guidance
This Part is designed to counter the avoidance of income tax at the higher rate by means of the device of allowing the profits of close companies to be accumulated rather than distributed to shareholders in whose hands the distributions would attract income tax at the higher rate. The Part does this by imposing a surcharge at the rate of 20 per cent on the undistributed after-tax investment and estate income of close companies (see Chapter 2). Chapter 1 of the Part is supplemental to Chapter 2 and is concerned with defining, in the first instance, what is meant by a close company (sections 430 and 431). The Chapter also contains a number of sections which provide for matters subsidiary to the meaning of “close company” (sections 432 and 433) and definitions for the purpose of the close company surcharge imposed by section 440 (section 434).
This section gives the definition of a “close company”. Broadly speaking, a close company is a company which is under the control of 5 or fewer participators or under the control of its participators who are directors (however many such directors there may be). A non-resident company, an industrial and provident society, most building societies, a company controlled by the State, by another EU Member State or by the Government of a territory with which the State has a tax treaty and a company controlled by a non-close company are not regarded as close companies. Definitions of terms used in this section are to be found in section 432 (meaning of “associated company” and “control”) and section 433 (meaning of “participator”, “associate”, “director” and “loan creditor”).
(1) A “close company” is a company under the control of 5 or fewer participators or under the control of participators who are directors (however many such directors there may be). Excluded from the definition are —
(2) & (2A) A company is to be regarded as controlled by the State if it is controlled by persons acting on behalf of the State. Where a company is so controlled but would otherwise be a close company (for example, by reason of being controlled by 5 or fewer persons), it will not be regarded as a close company unless the persons in control are acting independently of the State. This rule also applies to those companies controlled by or on behalf of a Member State of the European Communities or by the government of a territory with which Ireland has a tax treaty.
(3) The definition of close company is extended to include the case of a resident company where, on a full distribution, more than 50 per cent of the distributable income would be paid to 5 or fewer participators or to participators who are directors.
(4)(a) & (5) A company is not to be regarded as a close company where control is in the hands of a company or companies which are not themselves closely held and the company could not be regarded as being under the control of 5 or fewer participators without including as one of the participators at least one company which is not a close company. References here to a close company are to apply also to a non-resident company which, if resident, would be a close company.
(4)(b) Excluded from the definition of a close company is a company which comes within that description only by reason of the extended “control” provision of section 434(2) and the participator is regarded as such only because the participator is a loan creditor of the company and is not a close company. (The effect of section 432(2) is that a person is taken to have control of a company if, in the event of the winding up of the company, the person would be entitled to receive the greater part of the distributable assets of the company).
(6) Shares held by trustees are regarded as being in the beneficial ownership of a company which is not a close company where —
The effect of this is that the scheme must be one established for the benefit of employees, etc of an unrelated company which is not a close company.
Relevant Date: Finance Act 2021