(Read in conjunction with our blog on ‘Building A Business To Sell’)

Ireland’s Holding Company Regime – relief for the disposal of shares in a subsidiary

This article discusses one of the key features of Ireland’s holding company regime, the section 626B Tax Consolidation Act (TCA) 1997 capital gains tax relief for the disposal of shares in a subsidiary, called Participation Exemption (PE).

Section 626B TCA 1997 provides that, in certain circumstances, gains from the disposal of shareholdings by ‘parent companies’ are exempt from tax. There are a number of conditions that must be satisfied by the investor company and the investee company for the exemption to apply.

Conditions for the investor company:

  1. The investor company is required to have a minimum holding of at least 5%. Specifically, the

parent (investor company) must have been beneficially entitled to:

  • Not less than 5% of the investee company’s ordinary share capital;
  • Not less than 5% of the profits available for distribution to equity shareholders of the investee company and
  • Not less than 5% of the assets available for distribution on a winding-up of the investee company.
  1. The investor company must have the minimum holding in the investee company for a continuous period of at least 12 months in the 2 years prior to the disposal.

Conditions for the investee company:

  1. The investee company must carry on a trade or trades. Alternatively, the business of the

investor company and the investee company, taken together, must consist wholly or mainly of carrying on a trade or trades. ‘Wholly or mainly’ means greater than 50%. Revenue views that the primary tests which should be used are the proportion of net trading profits and the proportion of net trading assets, though other factors may be taken into account. These lesser considerations would include trading turnover as a proportion of gross receipts and the proportion of employees’ time devoted to trading and non-trading activities.

  1. At the time of the disposal, the investee company must be resident in a Member State of the EU or a country with which Ireland has a tax treaty. The PE applies automatically if the relevant conditions for the relief are met. It is important to note that if a loss is incurred by a parent company and the conditions for the PE are met, then there is no relief for the loss on the basis that if there had been a gain, it would not be taxable. The PE does not apply where the shares in the investee company derive the greater part of their value from land in Ireland or from minerals, or rights or interests in relation to mining or minerals or the searching of minerals in Ireland or exploration and exploration rights of the seabed. As a result of this As a result of this exclusion, it is essential to review the statement of financial position of the investee company and identify if more than 50% of the company’s value is derived from, for example, land and buildings in Ireland.

If an investor company is selling only part of its shareholding in an investee company, the PE may beavailable as long as the relevant conditions are met.

Example:

Apple Holding Ltd (Ireland) holds 80% of Orange Ltd (Ireland). Orange Ltd (Investee Company) is a trading company and its shares have been held by Apple Holding Ltd for 3 years. Apple Holding Ltd has been approached to sell its 80% shareholding to a French company. If Apple Holding Ltd sells its shares in Orange Ltd, any gain will be exempt under the PE.

Summary of the key points of PE

Irish holding (investor) companies can benefit from a full exemption from Irish capital gains tax in respect of gains arising on the disposal of shares in certain subsidiary (investee) companies if a shareholding, trading, assets and jurisdictional tests are met.

Shareholding test – investor company has held at least 5% of the ordinary shares (and had similar level of rights to profit distributions and assets) in the investee company for a continuous period of 12 months at any time within 2 years prior to the disposal AND

Trading test – the investee company is an active trading company or when viewed as part of a group (taken with the investor company and other 5% subsidiaries), that group is mainly (>50%) carrying on trading activities AND

Asset test – the investee company does not derive the greater part of its value from land in Ireland or from minerals, or rights or interests in relation to mining or minerals or the searching of minerals in Ireland or exploration and exploration rights of the seabed AND

Jurisdictional test – the investee company is tax resident in an EU country or a country with which Ireland has signed a double taxation treaty.