78 Computation of companies’ chargeable gains

Summary

For corporation tax purposes, chargeable gains are computed in accordance with capital gains tax principles. However, for the purpose of including chargeable gains in a company’s corporation tax computation, the chargeable gains are first reduced by any allowable losses, and the net gains are then recalculated to give an amount which, when charged at the normal corporation tax rate, produces the same tax result as if the net gains were charged at the appropriate capital gains tax rate.

Details

The chargeable amount

(1) The amount to be included in respect of chargeable gains in a company’s total profits for any accounting period is determined in accordance with subsection (3) after applying subsection (2). When the amount of chargeable gains so determined is included in the company’s total profits and charged to corporation tax at the prevailing rate of corporation tax for the accounting period, the result is to tax the gains at effective rates of corporation tax equal to the capital gains tax rates which would apply to similar gains realised by persons liable to capital gains tax.

Calculation of notional amount of capital gains tax

(2) Where chargeable gains accrue to a company for an accounting period a notional amount of capital gains tax is calculated in respect of those gains. This amount is calculated as if the company were liable to capital gains tax on those gains and as if accounting periods were years of assessment.

In arriving at the notional amount, chargeable gains accruing on disposals of development land are not taken into account. This is provided for in the definition of “chargeable gains” in subsection (4). (Gains on the disposal of development land are charged to capital gains tax and not corporation tax? see Notes on Chapter 2 of Part 22.)

It is also provided that, in calculating the notional amount of capital gains tax, section 31 applies as if the reference in that section to deducting allowable losses were a reference to deducting relevant allowable losses as defined in subsection (4) (that is, current losses which are allowable for capital gains tax purposes and losses carried forward from earlier years which are so allowable).

Determination of amount to be charged to corporation tax

(3)(a) This provision sets out the mechanism for converting the notional amount of capital gains tax calculated under subsection (2) into an actual amount in respect of chargeable gains to be taxed at corporation tax rates so as to yield an amount of corporation tax equal to the notional amount of capital gains tax. The mechanism is to include in a company’s total profits for the accounting period an amount in respect of chargeable gains of the company which if that amount was charged at the standard rate of corporation tax for that period would produce an amount of corporation tax equal to the amount of capital gains tax calculated in accordance with subsection (2).

(3)(b) Where part of an accounting period falls in one financial year and the other part in the following financial year, and different rates of corporation tax are in force for those years, the rate of corporation tax to be used for the purposes of the mechanism described in subsection (3)(a) is determined by the formula —

(A × C)		(B × D)
	+
E		E

where A is the rate per cent of corporation tax for the first financial year, B is the rate per cent of corporation tax for the following financial year, C and D are respectively the length of the parts of the accounting period falling in each of the financial years and E is the length of the accounting period.

Computation of gains/losses

(5) Chargeable gains and allowable losses for corporation tax purposes are computed in accordance with the principles applying for capital gains tax as if accounting periods were years of assessment. Exceptions are contained in section 615 (involving a transfer of assets between 2 companies on a reconstruction or amalgamation), section 617 (involving a transfer of assets between members of the same group), section 620 (“rollover relief” for business assets within a group of companies) and Chapter 2 of Part 20 (deemed disposal of assets where companies cease to be resident in the State).

References to income tax in Capital Gains Tax Acts

(6) References to income tax or to the Income Tax Acts in the Capital Gains Tax Acts are to be read as references to corporation tax in so far as companies are concerned with 2 exceptions, namely —

• the reference in section 554(2) to income tax in respect of a hypothetical trade (section 554 ensures that, where a trade or profession is not involved, allowable expenditure is confined to capital outlay by excluding from allowable expenditure for capital gains tax purposes any expenditure which, if it were incurred for the purposes of a trade, would be of a revenue nature),
• the capital gains tax provisions which apply only to individuals are not to apply to companies for corporation tax purposes.

Interaction of Capital Gains Tax Acts and Corporation Tax Acts

(7) The imposition of corporation tax on companies’ chargeable gains does not prejudice the operation of the Capital Gains Tax Acts, either generally or in relation to transactions in which both an individual and a company take part. Such transactions would include the disposal of an asset by an individual to a company with which the person is connected. In such a case the value at which the individual, is for capital gains tax purposes, deemed to have disposed of the asset is also the value at which, for corporation tax purposes, the company is deemed to have acquired it.

For example, for the purpose of computing capital allowances and balancing charges (for income tax or corporation tax) a transfer of an asset may be treated as made at the asset’s written down value where the buyer is connected with the seller. In such a case, section 555 provides that, for capital gains tax purposes, the asset is nevertheless deemed to have been acquired at its market value. This affects the computation of an allowable loss for the seller, and also affects the computation of an allowable loss for the buyer if the buyer later sells the asset. If one of these persons is an individual and the other is a company, section 555 is relevant for the individual in relation to capital gains tax and for the company in relation to corporation tax.

Liquidations

(8) The vesting of a company’s assets in a liquidator is not regarded as a disposal giving rise to a chargeable gain or a loss.

Relevant Date: Finance Act 2019