Revenue Note for Guidance

179 Conditions applicable where purchasing company is member of a group

Summary

Where a company is a member of a group of companies, the vendor’s and his/her associates’ interest in that group must, after the buy back of shares by a company within the group, be reduced by at least 25 per cent.

Details

Groups

(1) A “group” is a company which has one or more 51 per cent subsidiaries, but which is not itself a 51 per cent subsidiary of any other company, together with all its 51 per cent subsidiaries.

(2) The meaning of a group of companies is extended to include —

an unquoted company the whole or a significant part of whose business was previously carried on by the company buying back its own shares, or
an unquoted company the whole or a significant part of whose business was previously carried on by a company which is a member of the same group as the buy back company.

In addition, any company of which the unquoted company referred to is a 51 per cent subsidiary is a member of the group. This provision is designed to prevent the profits of a group, or the vendor’s shares in those profits, being taken out of the reckoning by transferring some of the trading activity to an outside company shortly before the buy back of shares by a company in the group. If a trading company which is not a member of a group transfers some of its trading activity to a separate company (possibly under common control), this provision will treat the 2 companies as a group.

(3) The provisions of subsection (2) do not apply where the part of the business previously carried on was transferred more than 3 years before the buy back of shares.

(4) Arrangements made to temporarily remove a company from a group before the buy back of shares are countered. Where arrangements exist for the subsequent return of a company to a group, the company leaving the group is treated as never having left in the first place.

Reduction in vendor’s interest

(5) Where the buy back is by a company which is a member of a group, special rules apply to determine whether there has been a substantial reduction in the vendor’s interest. These additional conditions have to be met where —

the company which buys back its shares is, immediately before it does so, a member of a 51 per cent group, and
either immediately before or after the buy back the vendor owns shares in one or more of the companies in the group other than the company purchasing the shares.

(6) If an associate(s) of the vendor owns shares in any group company immediately before the buy back of shares within that group, then, in determining whether there has been a substantial reduction in the vendor’s interest with respect to the group, the vendor and his/her associate(s) interests are aggregated both before and after the buy back.

(7) In determining whether a vendor has substantially reduced his/her interests in a group after his/her shares have been bought back within that group, the following companies must be taken into account —

the company which has acquired its own shares, and
any other group company in which the shareholder (or his/her associates) held shares either immediately before or immediately after the purchase.

Any such company is referred to as a “relevant company”.

(8) In applying the “substantial reduction of interest” criteria to the combined interests of a vendor and his/her associates, the vendor is assumed to have the interests of his/her associates.

(9) To determine a vendor’s interest as a shareholder in a group the following calculations must be made —

firstly, the nominal value of the vendor’s shares in each relevant company (that is, in each company in the group) is expressed as a percentage of the nominal value of that company’s share capital,
secondly, these percentages are aggregated, and
finally, the result so obtained is divided by the number of relevant companies (this means all relevant companies including any in which the vendor owns no shares after the buy-back. It is to be noted that it does not mean counting all group companies).

(10) This procedure provides an “average” fraction for all relevant companies. The divisor used in computing the “average” fraction (that is, the number of relevant companies) will be the same for the calculation of this fraction both before and after the buy back. For example, where the vendor does not own any shares in a relevant company as a result of a buy back that company will still be counted (despite the vendor owning no shares) for the purposes of calculating the “average” fraction after the buy back.

This calculation is made by reference to the situation of the vendor both immediately before and immediately after the buy-back. The 2 resultant “average” fractions are compared, and the buy back will not be treated as a distribution only where the fraction after the buy back is no more than 75 per cent of the fraction before the buy back.

Example

A is a shareholder in the members of a group of trading companies as follows —

	X Ltd	Y Ltd	Z Ltd
Issued share capital	10,000	10,000	10,000
Nominal value of shares held by A	2,000	500	0

A sells the shares in Y Ltd to that company, but retains the shares in X Ltd. A’s interest before the sale is —

×

+ 0 +

/2 =

After the sale A’s interest is —

2,000

10

+

0

+

0

/2 =

10,000

100

10

12.5

is 80% of

100

100

Therefore A’s interest in the group has not been substantially reduced.

Distributable profits

(11) In addition to the necessity for a substantial reduction in the vendor’s shareholding after the buy back of shares within a group of companies, it is necessary for a similar reduction to take place in the vendor’s interest in the distributable profits of the group. The proportion of the group’s profits available for distribution to which the vendor is entitled immediately before the buy back is compared with the corresponding proportion immediately after the buy back. Both proportions are calculated on the basis that the company distributes all its available profits. The vendor’s profit entitlement after the buy back must not exceed 75 per cent of his/her profit entitlement before the buy back.

Adjustments to distributable profits

(12) The same adjustments (set out in subsections (6) and (7) of section 178) in the computation of “profits available for distribution” apply in the case of a group as they apply in the case of a single company.

Example

1. Reduction in vendor’s shareholding in a group of companies

Five trading companies each have an issued share capital of 100 €1 ordinary shares, owned as follows —

	M Ltd	N Ltd	O Ltd	P Ltd	Q Ltd
A	40	20	–	90	–
B	60	–	40	10	–
M Ltd	–	80	60	–	–
P Ltd	–	–	–	–	100

(a) On 1 December, 2002 N Ltd purchases from A the holding of 20 shares. N Ltd and O Ltd are 51% subsidiaries of M Ltd, so that those 3 companies are a group. On 1 January, 2001, N Ltd had transferred one of its trades to Q Ltd, so that Q Ltd and its parent company P Ltd are also treated as members of the M Ltd group at 1 December, 2002 by virtue of section 179(2)(b).

The shareholding interest of A in the M Ltd group on 1 December, 2002 is —

Before the share purchase —

M

+ N

+ P

=

=

= 50%

After the share purchase —

M

+ N Nil

+ P

=

=

= 43.3%

O Ltd and Q Ltd are not included as A owned no shares in those companies.

The reduction in A’s shareholding interest in the group from 50% to 43.3% is less than 25% so that the consideration received from N Ltd will be subject to the distribution charge.

(b) If, instead, M Ltd purchased from A the holding of 40 shares on 1 December, 2002, the shareholding interest of A in the group would be —

Before the share purchase – 50% (as in (a))

After the share purchase —

M Nil

+ N

+ P

=

=

= 36.67%

This reduction is more than 25% but A will not have severed the connection with P Ltd (see sections 180(2) and 186(1)(a)) so that the consideration will still not escape the distribution charge.

(c) If P Ltd purchases from A 40 of A’s shares, the group of which P Ltd is a member does not include M Ltd, N Ltd or O Ltd (because no business has been transferred to any of those companies by either P Ltd or Q Ltd). A does not own any shares in Q Ltd either immediately before or immediately after the share purchase, so that it is not necessary to consider A’s interest in the group, only A’s interest in P Ltd. A’s interest in the shareholding in P Ltd is reduced from 90% to 50%, a reduction of more than 25%. However, as in (b) above, A will fall at another hurdle because A will not have severed A’s connection with the company (see sections 180(2) and 186(1)(a). The consideration will therefore be subject to a distribution charge.

2. Reduction in vendor’s profit share in a group of companies

The profits of each company available for distribution before any purchases of shares are as follows —

	M Ltd	N Ltd	O Ltd	P Ltd	Q Ltd
Undistributed profits	€1,100	€3,000	€2,000	€500	€5,500
Notional addition	€100	€100	€100	€100	€100
Available for distribution	€1,200	€3,100	€2,100	€600	€5,600
Notional distribution received by M Ltd from N Ltd (80%)	€2,480
O Ltd (60%)	€1,260
and by P Ltd from Q Ltd (100%)	€5,600
	€4,940	€3,100	€2,100	€6,200	€5,600
Amount receivable by A	€1,976	€620	Nil	€5,580	Nil
	(40%)	(20%)		(90%)

The total profits available for distribution of all the companies is €12,600 of which A is entitled to €8,176 (64.9%).

If N Ltd purchases A’s holding of 20 shares for €500, N Ltd’s distributable profits are reduced to €2,600 (that is, €3,100 less €500), all attributable to M Ltd (as M Ltd will then own 100% of N Ltd). M Ltd’s distributable profits are increased to €5,060 (that is, €1,200 plus €2,600 (from N Ltd) plus €1,260 (from O Ltd)) then and A’s entitlement to profits immediately after the purchase is €7,604 (€2,024 (from M Ltd) + €5,580 (from P Ltd)), that is, 62.8% of €12,100 (€12,600 – €500). This is more than 75% of 64.9% so that relief from the distribution charge is not available. Relief would in any case be refused because A has not severed A’s connection with M Ltd or P Ltd.
If alternatively M Ltd purchases A’s holding of 40 shares for €2,000, A’s entitlement to profits immediately after the purchase is €6,200 (€620 (from N Ltd) + 5,580 (from P Ltd)), that is, 58.5% of €10,600 (€12,600 – €2,000). This is still more than 75% of 64.9% so that relief from the distribution charge cannot be given.

Relevant Date: Finance Act 2019