New rules to target company directors cutting their tax bill

The Department of Finance has introduced an amendment to the Finance Bill to clamp down on a tax scheme under which directors of private companies were cutting their tax bill.

The amendment relates to so-called close companies, which are private companies involving small numbers of shareholders and follows cases where cash from selling a shareholding was taken out as a capital gain, rather than as income, thus sharply reducing the individual’s tax bill.

The move is understood to have resulted from the uncovering by Revenue of a number of specific tax avoidance schemes involving significant sums. Introduced at committee stage by the Minister for Finance, the amendment deals with schemes that avoid a liability to income tax by using a number of companies. The provisions are designed to ensure income tax is applied to the resulting distribution, imposing a 52 per cent tax rate rather than 33 per cent which would apply to a capital gain.

Two companies

The schemes involved the use of at least two companies and a shareholder selling his shares in one company and getting the cash for the sale paid out from the second. The amendment rules that provided the cash being paid out originally comes from the first company, this money must be treated as a distribution and thus be subject to income tax.

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In close companies, the directors and senior executives are typically also the shareholders and there have been rulings over the years to ensure the proper tax treatment of money being taken out of such firms. Sources in the tax industry say the Department of Finance is facing lobbying now on the basis that the restrictions proposed are too sweeping.