A close company in Irish tax law is a company under the control of five or fewer participators (shareholders) or under director control, with specific tax implications including surcharges on undistributed investment income and benefits in kind.
A Close Company in Irish tax law is a company that is controlled by five or fewer participators or is controlled by its directors. This classification has significant tax implications that differ from standard corporate taxation rules, particularly concerning the distribution of profits and investment income.
When your company is classified as a Close Company, Revenue applies specific rules designed to prevent tax avoidance through the accumulation of undistributed investment income or through loans and benefits provided to shareholders. These rules ensure that company profits are either distributed to shareholders as dividends (and taxed accordingly) or face additional surcharges if retained within the company.
The Close Company rules particularly affect investment income, including rental income, deposit interest, and dividends from other companies. For trading companies, the main impact relates to benefits provided to shareholder-directors and loans made to participators. Understanding these rules is essential for effective tax planning and compliance.
Under Irish tax legislation, a company is considered a Close Company if it is controlled by five or fewer participators, or if it is controlled by any number of participators who are also directors. The term 'participator' includes shareholders and certain loan creditors, while 'control' refers to the ability to exercise or acquire control over the company's affairs.
The control test looks beyond simple share ownership to consider arrangements that might give someone control, such as through voting rights, rights to assets on winding up, or rights to secure that income or assets are applied for their benefit. This means that even indirect control through trusts or other entities can bring a company within the Close Company definition.
There are specific exceptions to the Close Company rules, such as companies controlled by non-close companies, companies quoted on a recognised stock exchange, or companies controlled by non-residents where the principal members of the company are resident outside Ireland. These exceptions provide some relief but require careful analysis to ensure eligibility.
The most significant tax implication for a Close Company is the surcharge on undistributed investment income. Currently, this surcharge stands at 20% on after-tax investment income that is not distributed within 18 months after the end of the accounting period. This creates a strong incentive to distribute investment income to shareholders.
Close Companies also face restrictions on certain expense claims. Payments to participators that are not wholly and exclusively for business purposes may be disallowed, and loans to participators can trigger a charge to tax at 20% of the loan amount if not repaid within nine months of the end of the accounting period. These rules aim to prevent the extraction of company funds in tax-advantaged ways.
Additionally, benefits provided to participators or their associates are treated as distributions and subject to income tax, PRSI, and USC on the recipient, with the company potentially facing corporation tax charges on the benefit amount. This makes careful planning around shareholder benefits essential for Close Companies.
Shareholders in a Close Company face specific tax considerations that differ from those in widely-held companies. Loans from the company to shareholders trigger an immediate tax charge of 20% on the loan amount, payable by the company, unless the loan is repaid within nine months after the end of the accounting period.
When shareholders receive benefits from the company, such as rent-free accommodation, company cars for personal use, or other non-cash benefits, these are treated as distributions and subject to income tax, PRSI, and USC. The shareholder must include these benefits in their personal tax return, while the company may face additional corporation tax charges.
For shareholders considering equity financing or implementing a share option scheme, the Close Company status adds complexity. Option schemes can change the control structure of the company, potentially affecting its Close Company status, while equity financing rounds that bring in external investors might alter the number of participators controlling the company.
Avoiding unintentional Close Company status requires careful structuring of share ownership and control arrangements. One approach is to ensure that more than five individuals have meaningful control over the company, though this must be genuine rather than artificial arrangements that might be challenged by Revenue.
Introducing external investors through equity financing can change the control dynamic, particularly if you bring in institutional investors who become significant shareholders. However, this dilutes existing shareholders' control and may not be suitable for all businesses.
Reviewing your management equity arrangements can also help, as certain equity structures might inadvertently concentrate control in fewer hands than intended. Proper structuring of voting rights and control mechanisms from incorporation can prevent unexpected Close Company classification later.
If your company becomes classified as a Close Company, you must comply with specific reporting requirements and tax obligations. You'll need to maintain detailed records of loans to participators, benefits provided, and investment income earned, as these trigger specific tax calculations and potential surcharges.
Your corporation tax returns will require additional disclosures about Close Company status, and you may need to file supplementary forms detailing loans to participators and benefits provided. Failure to comply can result in penalties and interest charges on unpaid taxes.
It is important to note that Close Company status is not inherently negative—many successful Irish businesses operate as Close Companies. The key is understanding the rules and planning accordingly. Regular review of your shareholder structure and control arrangements with your tax advisor can help ensure compliance while optimising your tax position.
Despite the restrictions, Close Companies can utilise certain planning opportunities. Making timely distributions of investment income can avoid the surcharge, while carefully structuring shareholder remuneration packages can minimise the tax impact of benefits in kind.
Close Companies with trading income can still claim the 12.5% corporation tax rate on that income, while the surcharge only applies to investment income. This distinction allows businesses to retain trading profits for reinvestment without triggering surcharges, provided the funds are used for genuine business expansion rather than investment activities.
Working with a tax advisor familiar with Close Company rules can help identify opportunities within the framework, such as optimising the timing of distributions, structuring loans to participators appropriately, and ensuring all expense claims are properly documented to withstand Revenue scrutiny.
