Revenue Note for Guidance

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Revenue Note for Guidance

441 Surcharge on undistributed income of service companies

Summary

This section is designed to counter avoidance of tax arising from the diversion into close companies of income (usually arising from professional activities) which would otherwise attract income tax at the higher rate. The device consists of the setting up of a company for the purpose of carrying on a profession, providing professional services or holding an office or employment. It may also take the form of the setting up of a company controlled by persons engaged in a profession, etc for the purpose of carrying on a business of providing services or facilities for those persons. The profits of the company are withheld from distribution and therefore bear tax at the company tax rate rather than at the personal tax rates to which the profits, if distributed, would be liable in the hands of the shareholders. As these shareholders usually are liable at rates of personal tax which exceed the company tax rate the non-distribution results in loss of tax revenue. The section counters this method of tax avoidance by imposing a surcharge of 15 per cent on 50 per cent of the company’s undistributed professional and service income and a surcharge of 20 per cent on the company’s undistributed estate and investment income.

Details

(1) A “service company” is —

  • a close company which carries on directly a profession or the provision of professional services or which has or exercises an office or employment,
  • a close company which provides services or facilities of any nature to such a company, to an individual carrying on a profession, to a partnership carrying on a profession, to a person who holds or exercises an office or employment, or to a person or partnership connected with any such person or partnership.

Excluded are genuine cases where the services or facilities are provided for persons not connected with the company.

(2) A company is not a service company unless the principal part of its income chargeable under Cases I and II of Schedule D and Schedule E is derived from specified activities, that is —

  • carrying on a profession,
  • providing professional services,
  • having or exercising an office or employment,
  • providing services or facilities (other than the excluded services referred to above) to such person or partnership as is referred to above, or
  • any 2 or more of the activities so specified.

(3) A partnership is to be treated as connected with a company or individual (and vice versa) if any one of the partners is connected with the company or individual, and a partnership is to be treated as connected with another partnership if any one of the partners in it is connected with any one of the partners in the other.

(4)(a) A 15 per cent surcharge is imposed on the undistributed income of a service company. The total amount subject to a surcharge is the amount by which:

  • the aggregate of the distributable estate and investment income and 50 per cent of the distributable trading income of the company
  • exceeds the distributions made.

(4)(b)(iii) An increased surcharge of 20 per cent applies to an amount of the excess, to the extent that the distributable estate and investment income exceeds the distributions of the company for the accounting period. The balance of the excess remains subject to a surcharge of 15 per cent.

Example 1

The accounting period of a company is the 12-month period ending on 31 December 20X1. The company does not distribute all its distributable income. Its respective income and distribution position is —

Distributable Trading income (DTI)

€10,000

Distributable Estate and Investment Income (DEII)

€7,000

Distribution for year

€6,000
  1. Calculate the aggregate of 50 per cent of the DTI plus 100 per cent of the DEII.

    (€10,000 × 50%) + €7,000 = €12,000
  2. The total amount subject to a surcharge is the amount by which €12,000 exceeds the distribution (€6,000) of the company. This excess amount is €6,000.
  3. To establish how the €6,000 excess amount is apportioned between the surcharges at the different rates, calculate the excess of the DEII over the distributions.

    DEII

    €7,000

    less distribution

    (€6,000)

    €1,000

    The €1,000 amount is subject to a surcharge of 20%. The balance of €5,000 (i.e. €6,000 – €1,000) is subject to a surcharge of 15%.
  4. The surcharges are —

    €1,000 @ 20%

    =

    €200

    €5,000 @ 15%

    =

    €750

    Total surcharge imposed

    =

    €950

Example 2

A service company has Distributable Trading Income (DTI) of €12,000 and Distributable Estate and Investment Income (DEII) of €3,000 for a 12-month accounting period. The company pays a dividend of €4,000 in respect of the accounting period.

  1. Calculate the aggregate of 50% of the DTI plus 100% of the DEII.
      ( €12,000 × 50% ) + €3,000 = €9,000
  2. The total amount subject to the surcharge is €5,000, being the amount by which €9,000 (from Step 1) exceeds the distributions (€4,000) of the company.
  3. As the DEII is less than the distributions for the period, no amount is subject to the surcharge at 20%.
    The full amount of €5,000 is subject to the surcharge at 15%.
  4. The surcharge imposed is €750 (i.e. €5,000 @ 15% = €750).

(4)(b)(i) & (ii) There is no surcharge where the excess of the distributable income over the distributions, in the case of a single company, does not exceed €2,000. In the case of a group of associated companies, the €2,000 threshold is divided by one plus the number of associated companies. The threshold is time apportioned where the accounting period is less than 12 months. Marginal relief is provided where the excess is somewhat more than €2,000.

Example 3

Excess distributable income as computed under this subsection

€2,200

Surcharge @ 15%

€330

However, the liability is restricted to 80% of the excess over €2,000, that is 80% of (€2,200 - €2,000) = 80% of €200 = €160 and this is the amount which will be payable by the company. (It should be noted that Marginal relief runs out where the excess exceeds €2,461).

(5) The provisions of subsections (2) to (7) of section 440 are applied to the surcharge under this section.

(6) The provisions of section 434(2), (3), (3A), (6) and (7) regarding the distributions to be taken into account for the purpose of computing a surcharge are applied for the purposes of the section. The provisions of section 434(1), which defines the income of a company for an accounting period, and section 434(1) and (5A), which define the distributable estate and investment income and the distributable trading income of a company for an accounting period, are also applied for the purposes of this section.

Relevant Date: Finance Act 2025