Revenue Note for Guidance

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Revenue Note for Guidance

626B Exemption from tax in the case of gains on certain disposals of shares

Summary

This section provides for an exemption from tax in the case of certain capital gains from the disposal of holdings in subsidiaries.

Certain conditions must be met before a gain can be exempt.

  • First, the investor company must have a minimum shareholding in the investee company. The investor is required to have a minimum holding of at least 5 per cent in the investee company for a continuous period of at least 12 months in the 3 years prior to the disposal.
  • Second, the investee company must carry on a trade, or the business of the investor company, its investee company and their “5 per cent” investee companies, taken as a whole, must consist wholly or mainly of the carrying on of a trade or trades.
  • Finally, at the time of the disposal the investee company must be resident in an EU Member State, a territory with which Ireland has a double tax treaty in force or a territory with which Ireland has signed a double tax treaty which has yet to come into force.

The exemption does not apply where the shares are part of a life assurance company’s life business fund nor will it apply to shares which derive the greater part of their value from land or minerals in the State, rights, interests or other assets in relation to mining or minerals or the searching for minerals or exploration or exploration rights relating to gas or oil. Furthermore, the exemption does not apply to deemed disposals under the provisions of section 627. Finally, the exemption does not apply where any of the provisions of the anti-avoidance section 590 apply except where the participator (within the meaning of that section) is a company.

Details

Definitions

(1)(a) “relevant territory” means a Member State of the EU, a territory with which Ireland has a double tax treaty in force or a territory with which Ireland has signed a double tax treaty which has yet to come into force.

“tax” in relation to a relevant territory other than the State is tax that corresponds to corporation tax in the State.

Other interpretation rules for the purposes of sections 626B and 626C and Schedule 25A

(1)(b)(i) A company will be regarded as a parent company throughout an uninterrupted period of 12 months throughout which it holds 5 per cent of another company’s share capital. The shares can be held directly or indirectly. The holding must also be a “real” holding i.e. the company must be entitled not only to 5 per cent of the shares but also to 5 per cent of any distribution made by the other company and 5 per cent of the company’s assets on a winding up. Certain provisions of this Act are applied for the purposes of determining whether a company has the required holding.

  • (1)(b)(i)(A) Relevant parts of section 9 are applied. Those parts contain detailed rules on what is required in the case of indirect holdings. Section 411(1)(c) is disapplied so as not to restrict this section to companies resident in EEA countries.
  • (1)(b)(i)(B) Sections 413 to 419 which ensure that holdings are “real” and cannot be contrived, are applied.

(1)(b)(ii) In determining whether a company satisfies the holding requirements in subsection (2)(a), a company that is a member of a 51 per cent group will be treated as holding any shares that other members of that group hold and as being entitled to any rights that those other group members are entitled. However, this does not apply in the case of shares held as part of a life business fund of a life assurance company.

(1)(b)(iii) In deciding whether the exemption in subsection (2) applies, the question of whether there is a disposal is to be decided on the facts and without regard to section 584. That section provides that a reorganisation or reduction of share capital is to be treated as not involving any disposal. Where the exemption under subsection (2) applies, the section 584 treatment will not apply.

(1)(b)(iv) Where a company is in liquidation, the fact that the company is in liquidation is ignored for the purposes of this section and entitlement to exemption will be determined on the basis that actions of the liquidator in relation to assets are actions of the company.

(1)(b)(v) Section 616 which would otherwise restrict the measure to companies resident in EEA Member States is disapplied.

Exemption from Capital Gains Tax: Disposal of shares by an investor company in an investee company

(2) A gain by an investor company on the disposal of shares in an investee company will not be a chargeable gain if it meets a number of conditions. The conditions include a shareholding requirement, a requirement concerning the investee company’s residence and a trading requirement.

Shareholding requirement

The investor company must be a parent (defined in subsection (1) as holding 5 per cent) of the investee. To qualify for exemption the disposal must either:

  • (2)(a) have taken place when the investor company was a parent of the investee company. (An investor company is regarded as a parent company of an investee company at any time if that time is within a continuous period of 12 months throughout which the investor has a “real” holding of at least 5 per cent of the investee company), or
  • have taken place within 2 years of the most recent time that the investor company was a parent of the investee company.

Residence Condition

(2)(b) The investee company must be resident in a relevant territory, i.e. an EU Member State, a territory with which Ireland has a double tax treaty in force or a territory with which Ireland has signed a double tax treaty which has yet to come into force.

Trading Condition

(2)(c) A requirement for trading at the time of disposal is imposed. This trading requirement can be satisfied by either the investee company or the group. The alternatives are—

  • the business of the investee consists wholly or mainly of trading.
  • the trading condition can be met by reference to the group. The test is that the business of the investor and its 5 per cent investees, the investee and its 5 per cent investees, taken together, consists wholly or mainly of the carrying on of a trade or trades.

Circumstances in which the exemption does not apply

(3) There are a number of circumstances in which the exemptions provided by this section and section 626C do not apply. These are as follows:

  • (a) where a disposal is regarded as being for a consideration that gives rise to no gain or no loss.
  • (b) where a gain is already exempt.
  • (c) where the shares are held as part of the life business of a life assurance company.
  • (d)&(3B) where the shares derive the greater part of their value from land or minerals in the State, any rights, interests or other assets in relation to mining or minerals or the searching for minerals or exploration or exploration rights relating to gas or oil – the value of assets which are transferred to a company to ensure that the greater part of the value of its shares is not derived from such assets is ignored in determining the value of the shares concerned, where the motive for the transfer was the avoidance of tax.
  • (e) where a disposal is regarded as a deemed disposal under the provisions of section 627.
  • (3A) where any provision of section 590 applies except where the participator (within the meaning of that section) is a company

Relevant Date: Finance Act 2019