Revenue Note for Guidance
This section is designed to counter avoidance of tax arising from the diversion into close companies of income (usually arising from professional activities) which would otherwise attract income tax at the higher rate. The device consists of the setting up of a company for the purpose of carrying on a profession, providing professional services or holding an office or employment. It may also take the form of the setting up of a company controlled by persons engaged in a profession, etc for the purpose of carrying on a business of providing services or facilities for those persons. The profits of the company are withheld from distribution and therefore bear tax at the company tax rate rather than at the personal tax rates to which the profits, if distributed, would be liable in the hands of the shareholders. As these shareholders usually are liable at rates of personal tax which exceed the company tax rate the non-distribution results in loss of tax revenue. The section counters this method of tax avoidance by imposing a surcharge of 15 per cent on 50 per cent of the company’s undistributed professional and service income and a surcharge of 20 per cent on the company’s undistributed investment and estate income.
(1) A “service company” is —
Excluded are genuine cases where the services or facilities are provided for persons not connected with the company.
(2) A company is not a service company unless the principal part of its income chargeable under Cases I and II of Schedule D and Schedule E is derived from specified activities, that is —
(3) A partnership is to be treated as connected with a company or individual (and vice versa) if any one of the partners is connected with the company or individual, and a partnership is to be treated as connected with another partnership if any one of the partners in it is connected with any one of the partners in the other.
(4)(a) A 15 per cent surcharge is imposed on the undistributed income of a service company. In computing the amount by which the distributable estate and investment income of the company exceeds the distributions made, 50 per cent of the total amount of the distributable trading income of a service company is to be excluded.
(4)(b)(iii) An increased surcharge of 20 per cent applies to an amount of the excess, being an amount which is not greater than the excess of the aggregate of —
over the distribution of the company, for the accounting period.
The accounting period of a company is the 12 month period ending on 31 December 2013. The company does not distribute all its distributable income. Its respective income and distribution position is —
Distributable income (DI) |
€10,000 |
|
Distributable Investment Income (DII) |
€3,000 |
|
Distributable Estate Income (DEI) |
€4,000 |
|
Distribution for year |
€6,000 |
€5,000 + (€3,000 + €4,000) = €12,000 |
DII + DEI |
€7,000 |
less distribution |
€6,000 |
€1,000 |
€1,000 @ 20% |
= |
€200 |
€5,000 (€6,000 – €1,000) @ 15% |
= |
€750 |
Total surcharge imposed |
= |
€950 |
(4)(b)(i) & (ii) There is no surcharge where the excess of the distributable income over the distributions, in the case of a single company or a group of associated companies, does not exceed €2,000 (€635 for accounting periods ending on or before 31 December 2012). Marginal relief is provided where the excess is somewhat more than €2,000.
Excess distributable income as computed under this subsection |
€2,200 |
|
Surcharge @ 15% |
€330 |
However, the liability is restricted to 4/5 (80%) of the excess over €2,000, that is 4/5 (80%) of (€2,200 – €2,000) = 4/5 (80%) of €200 = €160 and this is the amount which will be payable by the company. (It should be noted that Marginal relief runs out where the excess exceeds €2,461).
(5) The provisions of subsections (2) to (7) of section 440 are applied to the surcharge under this section.
(6) The provisions of section 434(2), (3), (3A), (6) and (7) regarding the distributions to be taken into account for the purpose of computing a surcharge are applied for the purposes of the section. The provisions of section 434(1), which defines the distributable income of a company for an accounting period and section 434(5A) which defines the distributable investment income and the distributable estate income of a company for an accounting period are also applied for the purposes of this section.
Relevant Date: Finance Act 2019