Revenue Note for Guidance
625 Shares in subsidiary member of group
Summary
This section protects against possible tax avoidance within a group of companies through the disposal of shares in a subsidiary to another group member in order to avoid a tax charge on such a disposal by virtue of section 617.
Details
(1)(a) & (2) Where a company (known as “the subsidiary”) ceases to be a member of a group of companies and, on an earlier occasion, shares in the subsidiary were disposed of by another company (known as the “chargeable company”) as part of a reconstruction or amalgamation, within 10 years before the subsidiary left the group, then the chargeable company is deemed to have disposed of and immediately reacquired the shares at market value immediately before the earlier amalgamation or reconstruction. This effectively imposes a charge to tax on the chargeable company.
(1)(b) This section does not apply to a subsidiary which leaves the group by reason of a winding-up or dissolution of the subsidiary or of another member of the group.
(3) The principal company of a group may be assessed to the tax if at the time when the subsidiary leaves the group the chargeable company has been wound up.
(4) Tax so assessed which remains unpaid 6 months after the due date may be assessed, within 2 years after that date, on the principal company of the group (or any company taking an interest in the subsidiary as part of the amalgamation or reconstruction). The company paying the tax is given rights of recovery against the company which should have paid it.
(5) The time for making such an assessment is extended to 10 years from the date of the company leaving the group (the ordinary time limit would be insufficient as liability arises from deeming something to have happened). Provision is also made for adjustment of assessments to be made in cases where before the subsidiary finally left the group there had been a disposal or part disposal of shares in that subsidiary.
Disposal of shares include —
- (6)(a) the exchange of shares for the purposes of reconstruction or amalgamation where the rules applying to such an exchange apply here so as to equate shares in a company with shares or debentures in another company,
- (6)(b) the disposal of shares in a reconstruction or amalgamation where the companies are members of the same group or become members of the same group as a result of the reconstruction or amalgamation,
- (7) the cancellation of shares (including the extinction of shares as a result of a merger or a division under the Companies Act 2014) for the purpose of replacing them by new ones under a reconstruction or amalgamation.
Examples
Company A owns all the shares in Company B. It paid €1,000 for the shares, which are now worth €10,000. If Company A sells those shares outside the group it will be chargeable to tax on a gain of €9,000.
Company A sets up another company (Company C) with 10,000 €1 shares, all of which are taken up by Company A. Company A then sells the shares in Company B to Company C for €10,000. Under section 617, this does not give rise to any charge on Company A.
Company C has acquired the shares in Company B at their market value (€10,000) and therefore can sell them for €10,000 without any chargeable gain. Through its control of Company C, Company A can then secure that the sale proceeds, €10,000, go back to it as a loan. Company A has now realised its capital gain, €9,000, without any liability to tax, and so long as Company C remains in existence (even if dormant) the capital gains tax charge will be postponed.
This section counters this by providing that, when Company B ceases to be a member of the group (that is, when Company C sells its shares outside the group), Company A (the chargeable company) is treated as if, immediately before the sale of the shares to Company C, Company A had sold and immediately reacquired those shares at their market value (€10,000) thus giving rise to a chargeable gain of €9,000.
Relevant Date: Finance Act 2019