434 Distributions to be taken into account and meaning of “distributable income”, “investment income”, “estate income”, etc.

Summary

This section defines certain terms which are used in Part 13 for the purpose of identifying income liable to the surcharge under section 440 on the undistributed investment and estate income of close companies and under section 441 on the undistributed investment and estate income and undistributed trading (professional) income of service companies.

Details

(1) The term “estate income” means income in the nature of rent from land or buildings which is chargeable to tax under Case III, IV or V of Schedule D.

For the purposes of calculating surcharges “franked investment income” excludes distributions made out of exempt income (e.g. distributions out of profits or gains from stallion fees, stud greyhound service fees and occupation of certain woodlands).

The term “investment income” of a company is income other than estate income which would not, in the hands of an individual, be earned income within the meaning of section 3 but does not include such income received in the course of trading. However, without affecting the meaning of “franked investment income”, a dividend or other distribution by a company will not be regarded as “investment income” for the purposes of the close company surcharge if the close company to which it is paid would be exempt from tax on any gains on the disposal of those shares under section 626B at the time the dividend or distribution is being made.

“Relevant charges” are charges on income allowed under section 243 (i.e. charges allowed against non-trading income), other than charges of an excepted trade within the meaning of section 21A. These are deductible in calculating estate and investment income of a company for surcharge purposes.

The term “trading company” means any company which exists wholly or mainly for the purpose of carrying on a trade, and any other company whose income does not consist wholly or mainly of investment or estate income.

(2) Subject to subsection (3A), the distributions of a company for an accounting period are the sum of the dividends declared for the accounting period and paid or payable not later than 18 months after the end of the accounting period and any other distributions made during the accounting period.

(3) Apportionments of distributions on a time basis are to be made where the period for which a company makes up accounts and makes distributions is not an accounting period for corporation tax purposes.

(3A) (a) Where a close company pays a dividend or makes a distribution to another close company, the companies may jointly elect that the dividend or distribution is not to be treated as a distribution for the purposes of section 440 (which imposes a surcharge on the undistributed investment and estate income of close companies). A notice to elect must be given to the Collector General of Revenue in such manner as the Revenue Commissioners may require.

(3A) (b) Where an election is made under paragraph (a), the dividend or distribution is treated for the purposes of section 440 as not being a distribution. This means that it is not to be taken into account as a distribution in determining the extent to which the dividend- paying company has distributed its profits.

The dividend or distribution is treated as not being franked investment income of the receiving company. This means that, in determining whether the receiving company is liable to a surcharge, the dividend or distribution will not be counted as income of that company.

(3A) (c) A joint election made under paragraph (a) is to be included by both companies in their respective annual corporation tax returns for the accounting period concerned.

(4) For the purpose of the surcharge, the “income” of a company for an accounting period is to be computed-

• exclusive of franked investment income,
• without regard to any losses, deficiencies, expenses of management or charges on income carried forward from an earlier accounting period,
• without regard to any losses or deficiencies carried back from a later accounting period, and
• after deducting any losses, deficiencies or relevant trading charges on income (under section 243A) of the current accounting period.

(5)(a) The “estate and investment income” of a company is the amount by which —

• the sum of the franked investment income and the part of the company’s total income which is attributed to estate income and investment income (that part is calculated by way of the following formula-
       Income x A/B
  where:
  • “A” is the total estate income and investment income, and
  • “B” is the income of the company before deduction of any current year losses, deficiencies or relevant trading charges on income (under section 243A)),
• exceeds the total amount of relevant charges (i.e. non-trade charges) and expenses of management.

(5)(b) The “trading income” of a company is the company’s total income (as calculated by section 434(4)) less—

• the part of the company’s total income which is attributed to estate income and investment income (the part calculated by way of the formula Income x A/B),
• charges of an excepted trade within the meaning of section 21A,
• non-trad charges and management expenses which could not be taken into account in computing the estate and investment income of the company (as calculated by this subsection).

(5A)(a) “Distributable estate and investment income” is the estate and investment income less the corporation tax which would be payable on the income. The “distributable trading income” is the trading income less the corporation tax which would be payable on that income.

(5A)(b) In the case of a trading company the distributable estate and investment income is reduced by 7.5 per cent.

(6) Income is to be time apportioned to parts of accounting periods. Such an apportionment would be required where, for example, the company concerned was a close company for only part of an accounting period.

(7) The surcharge is not to apply to any income which a company is by law precluded from distributing.

Relevant Date: Finance Act 2025