Tax Point - Tax
Buyback by a company of its own shares
Whether it be in the context of succession planning, a disgruntled shareholder or a marriage break-up the ability of a company to buyback its own shares is a useful mechanism for Irish businesses.
Broadly, any repayment over and above the amount which the company received for a subscription of shares is treated as a distribution and subject to income tax at marginal rates. If certain conditions are met, however, the shareholder may avail of capital gains tax treatment on the buyback.
This can be beneficial where the shareholder would be otherwise unwilling to exit the company due to the prospect of a significant income tax charge on a share buyback.
Main legislative provisions
S176 – 186 TCA 1997 contain the legislative provisions pertaining to share buybacks by unquoted companies. The main conditions for relief are that:
- the company must be a trading company or the holding company of a trading company;
- the shareholder participating in the share buyback must be both resident and ordinarily resident in the State in the tax year in which the share buyback takes place;
- the shareholder must own the shares for a period of at least five years ending on the date on which the disposal;
- the share buyback must be for the benefit of the company's trade;
- the participating shareholder's remaining shareholding in the company after the buyback (expressed as a percentage of the company's issued nominal share capital) must not exceed 75% of what it was pre the buyback; and
- the shareholder must no longer be connected with the company (broadly after the transaction the shareholder and his associates must own less than 30% of the company).
For the purposes of tests 5 & 6 above the interest in the company held by persons associated with the disposing shareholder are deemed to be held by the disposing shareholder. An associate includes a husband or wife (that are living together) and a minor child of the disposing shareholder (there are other provisions in relation to controlled companies, estates etc. but these are beyond the scope of this article).
Effectively the associated persons provision prevents a shareholder whose spouse holds a substantial interest in the company availing of capital gains tax treatment on a share buyback.
Where a buyback is undertaken a return of the details must be made to Revenue (Form AOS1). Any payment made by a company for the purchase of its own shares is not deductible against profits of the company for tax purposes.
Trade benefit test
As noted above, in order to qualify for capital gains tax treatment, the buyback must be wholly or mainly undertaken to benefit the company’s trade. The test would not be met where, for example, the sole or main purpose of the buy-back is to benefit the shareholder or to benefit a business purpose of the company other than a trade. Revenue outlined in Tax Briefing 25 that they will normally regard a buy-back as benefiting the trade where:
- the purpose is to ensure that an unwilling shareholder who wishes to end his/her association with the company does not sell the shares to someone who might not be acceptable to the other shareholders; or
- there is a disagreement between the shareholders over the management of the company and that disagreement is having or is expected to have an adverse effect on the company’s trade and where the effect of the transaction is to remove the dissenting shareholder.
Examples of this would include:
- a controlling shareholder who is retiring as a director and wishes to make way for new management;
- an outside shareholder who has provided equity finance and wishes to withdraw that finance;
- a legatee of a deceased shareholder, where she/he does not wish to hold shares in the company; and
- personal representatives of a deceased shareholder where they wish to realise the value of the shares.
Generally Revenue expect the exiting shareholder to dispose of their entire interest in the company but are willing to accept, in certain circumstances, a shareholder retaining some shares for sentimental reasons or for genuine business reasons e.g. where the impact of the disposing shareholder exiting completely would be negative for the company’s business.
Where doubt exists as to whether a buyback would benefit a company’s trade a Revenue advance opinion can be sought.
The Finance Bill 2010 introduced an amendment that provides that an individual can come within the scope of the retirement relief provisions on the proceeds of a disposal of shares pursuant to a redemption by a family company of its own shares. It was generally accepted that an individual could avail of retirement relief from capital gains tax on the buyback of their shares provided that all other conditions for relief were met before this provision was introduced.
If a stock transfer form or other instrument of transfer is executed in the course of a share buyback transaction, Revenue consider that stamp duty will be chargeable in the same manner as a normal transfer of a company’s shares.
It is common practice when dealing with share buybacks for a contract for the sale and purchase by the company of the shares to be created and thereby avoid the creation of any stock transfer form or other instrument which transfers legal title to the shares.
If the contract does not itself give rise to a conveyance, the contract itself will not be stampable. Revenue in their Stamp Duty Work Manual and Practices note:
“The shares can be bought back on foot of a contract or share purchase agreement. If the shareholder and the company enter into an agreement and the shareholder simply hands over the share certificates to the company there is no need for a stock transfer form and no duty can be charged. The share purchase agreement is not chargeable to duty as it falls outside the scope of s31, Stamp Duties Consolidation Act 1999 (stamp duty on contracts)”.
It is worth noting some of the company law requirements of undertaking a share buyback:
- the shares must be repurchased out of profits available for distribution. In addition, there is a provision which allows the company to use the proceeds of a share issue made solely for the purpose of funding the re-purchase;
- a special resolution by the members of the company in a general meeting must be passed. It should be noted that the purchase is ineffective if any member of the company holding shares who will be affected by the share buyback votes in favour of the resolution and the resolution would not have been passed without his/her votes;
- once the shares are repurchased the company has two options. It may either cancel the shares or hold them as treasury shares;
- the shares to be repurchased must have been fully paid up; and
- the company must deliver a return to the Companies Registrar outlining the number and class of shares purchased, their nominal value and the date upon which they were delivered back to the company.
MARK DOYLE is Tax Manager with Grant Thornton Financial and Taxation Consultants Limited. Email: firstname.lastname@example.org