Revenue Note for Guidance
This section prevents the avoidance of capital gains tax on certain disposals by a company of shares in another company. The capital gains tax is avoided by the payment by the company whose shares are being sold of an abnormal dividend in connection with the disposal of the shares. That dividend is exempt in the hands of the receiving company because it is a dividend paid by an Irish resident company to a company that is within the charge to corporation tax. As a result of the payment of the dividend, a much smaller amount is payable for the shares, thus reducing the capital gains tax on the transaction.
The section provides that where there is an abnormal dividend paid to a company in connection with the disposal of shares in a company, the amount of the dividend is to be treated for tax purposes as proceeds for the disposal of the shares rather than a dividend. This ensures that the gain arising will be subject to capital gains tax.
(1) A dividend paid in connection with a disposal of shares or securities in a company will be regarded as abnormal if the amount of the dividend exceeds what could reasonably have been expected to be paid in respect of the shares or securities if there were no such disposal. This would involve taking a reasonable view as to the amount of dividend that might have been paid in the absence of a disposal. Where the dividend exceeds that, it will be regarded as being abnormal.
The explanation is phrased in terms of dividends and distributions. A dividend is selfexplanatory. A distribution includes a dividend but is broader. It includes any distribution out of the assets of a company, whether in cash or otherwise, in respect of shares in the company.
(2) The section applies where, in connection with a disposal of shares or securities of a company, there is a scheme, arrangement or understanding for the payment of an abnormal dividend to a company. The company to whom the payment is made must be a company as described in the following two situations:
The first situation is where a company is making the disposal. In this case the section will apply only where the company to whom the abnormal dividend is paid is the company making the disposal or a company connected with that company.
The second situation is where a person other than a company is making the disposal. In this case the payment must be made to a company connected with that person.
The question as to whether a company is connected with any person is set out in section 10.
Where the above criteria are met. The amount or value of the dividend or distribution is to be treated for tax purposes as consideration received by the person disposing of the shares or securities and not as a dividend for the purposes of the Tax Acts.
(3) The section does not apply if it is shown that the scheme, arrangement or understanding is effected for bona fide commercial reasons and is not any part of scheme, arrangement or understanding a main purpose of which is avoidance of liability to tax.
Relevant Date: Finance Act 2021