Finance Act 2004 – Capital Gains Tax

Section 42 inserts two new sections and a Schedule into the Taxes Consolidation Act 1997. The new provisions provide for exemption from capital gains tax for certain disposals by an investor company of shares held by it in an investee company. Both gains and losses on such disposals will be ignored for tax purposes.

The main exemption which is in the newSection 626B applies where:

• at the time of the disposal the investee company is resident for tax purposes in the EU or in a country with which Ireland has a tax treaty;
• the investor company has held for a period of at least 12 months ending in the previous 24 months -
  1. at least 10 per cent of the investee company and that holding had a value of €15 million, or
  2. at least 5 per cent of the investee company and that holding had a value of €50 million;
  and
• at the time of the disposal either
  1. the investee company must carry on a trade, or
  2. the business of the investor company, its 10 per cent investee companies, the investee company and the investee’s 10 per cent investee companies taken as a whole consists wholly or mainly of trading.

The exemption does not apply –

• where the disposal is already treated under the Taxes Consolidation Act 1997 as being for a consideration such that no gain or no loss arises, or it is otherwise exempt under the Act,
• to disposals of shares which are part of a life assurance company’s life business fund, or
• to disposals of shares deriving the greater part of their value from land in the State or from minerals, or rights or interests in relation to mining or minerals or the searching for minerals.

The new Section 626C provides for a secondary exemption. This applies to options to acquire shares and to certain convertible securities related to shares in similar circumstances to those in which a gain is exempt underSection 626B.

In determining whether the exemption applies, the investor company will be treated as holding all shares that its fellow “51 per cent’’ group companies hold.

A new Schedule 25A inserted into the Taxes Consolidation Act 1997 supplementsSection 626B and deals with the interaction between the new sections and certain existing reliefs.

• Paragraph 1 provides that in order to determine whether the company disposing of shares has held them for the required holding period, the period of ownership of shares by a company can be extended where the shares were acquired in a transaction that is treated as giving rise to neither a gain nor a loss. This could arise where assets are transferred within a group of companies. No gain or loss is treated as arising but the new owner takes over the assets for capital gains tax purposes at their original base cost. In these circumstances, where the assets consist of shares the new owner is allowed to extend the period of ownership by the time for which the shares were held by the previous owner;
• Paragraph 2 provides that if a company is deemed under the Act to dispose of and immediately reacquire shares which it holds (thus crystallising a gain), the holding of the shares in the period prior to the deemed disposal is not taken into account for the purposes of the holding period requirement;
• Paragraph 3 deals with repurchase agreements where a company transfers shares to another company subject to an agreement that the original owner will buy them back. Shares transferred under such a repurchase agreement are regarded as remaining with the original holder for the purposes of determining whether the shareholding requirement for the purposes of the exemption has been met;
• Paragraph 4 contains a similar provision in relation to stock lending arrangements;
• Paragraph 5 deals with a situation where in the case of a reconstruction a company which held shares in one company exchanges them for shares in a second company in circumstances that there is no charge to capital gains tax but the cost of the old shares carries through as the cost of the new shares. In these circumstances the period of ownership of the new shares can include the period of ownership of the old shares for the purposes of the holding period requirement;
• Paragraph 6 provides that a company may not claim relief for a loss in value of shares which have negligible value if a gain on a disposal of the shares would be exempt under the newSection 626B;
• Paragraph 7 deals with a situation where a company that is a member of a group had acquired an asset on a tax neutral basis. If that company ceases to be a member of the group there is a deemed disposal and reacquisition of the asset at the time of its acquisition from the other member of the group, thus crystallising a gain. In effect, paragraph 7 allows the exemption under Section 626B to apply if the conditions for exemption are satisfied at the time the company ceases to be a member of the group.
• Finally, paragraph 8 deals with the situation where shares are appropriated by a company as trading stock. It ensures that where the gain on the shares is exempt as a consequence of Section 626B, the company is treated as acquiring the shares at market value for the purposes of computing the profits of the trade to which they are appropriated.

The section is subject to clearance by the European Commission from a State aid perspective and will come into effect following the making of a commencement order by the Minister for Finance.