Revenue Note for Guidance

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Revenue Note for Guidance

417 Diminishing share of profits or assets

Summary

This section applies where there might be an arrangement whereby an equity holder’s share in a distribution of profits, or of assets on a winding up, would change in a later accounting period or if such rights differ with the passage of time. For example, shares might lose the right to participate in profits or in assets on a winding up or other shares might gain such rights. This might be used to enable one company to have the 75 per cent entitlement at a time when it would be advantageous for group relief purposes. This section prevents such a situation arising by ensuring that for the purposes of the 75 per cent test whichever is the lower of the equity holder’s present or future rights is to be taken into account.

Details

(1) The section applies if at any time in a relevant accounting period (see section 419) any equity holder has such shares or securities in the company as would, if a distribution of profits or sharing of assets of the company were made in respect of the shares or securities in a later accounting period (rather than in that relevant accounting period), entitle the equity holder to a percentage on the distribution or profits or a sharing of assets different from the percentage in relation to such matters to which the equity holder is entitled in the relevant accounting period.

(2) Where the section applies, the percentage of profits on a profit distribution or percentage of assets on the notional winding up is to be determined for the relevant accounting period as if the rights attaching to the shares or securities for the relevant accounting period were the same as those of the later accounting period.

(3) Where in a relevant accounting period an equity holder has shares or securities in respect of which there are arrangements (for this purpose “arrangements” means arrangements of any kind, whether in writing or not – see section 427(1)) by virtue of which the equity holder’s entitlement under the arrangements could differ from his entitlement if there were no arrangements. In such circumstances it is to be assumed that effect would be given to the arrangements in the later accounting period and, accordingly, the shares or securities are to be treated as if the variation in the equity holder’s entitlement to profits or assets resulting from this assumption was the same as the entitlements to vary rights referred to in subsection (1).

(4) The percentage entitlement as determined under subsections (2)(a) and (2)(b) is to be substituted for the actual percentage entitlement for the relevant period where this is less than the actual entitlement.

(5) In any case where there is a limitation of the actual distribution for the relevant accounting period so that this section and section 416 apply, the 2 sections are to be applied separately (in relation to the profit distribution and the notional winding up) —

  • on the basis specified in subsection (2), and
  • disregarding that subsection,

and the lowest percentage emerging is the one for use in applying the 75 per cent test.

Example

In the example given in the notes on section 416 it might be possible to circumvent that section by allotting to company B 75 per cent of the ordinary share capital in company A. Under section 416 the entitlement to a maximum dividend of €5,000 or maximum share of assets €10,000 would still be disregarded, but the entitlement of company B would be taken to be 75 per cent by virtue of the 75 per cent shareholding. If, however, there is a further arrangement that the dividend or asset rights attaching to these shares will be or may be reduced at some future time, then, by virtue of this section, section 416 applies as if those future reduced rights were operative in the relevant accounting period, so that the rights will be taken to be less than 75 per cent and company B will not pass the test.

Relevant Date: Finance Act 2019