Did you know that Ireland has a very generous holding company tax relief? For the growing SME, it is worth knowing the rules about holding companies in Ireland because smart business people in the know are using them to be more tax-efficient and to give themselves better options.
What is a holding company?
A holding company is a company that owns another subsidiary company. The advantage of being in a holding company group is that there is no restriction on transferring money or lending money within that group. If you become a VAT group, then you don’t even have to worry about charging VAT between the subsidiaries. But one of the biggest benefits we find with holding companies is the tax relief available to you when you are selling a subsidiary.
Selling a subsidiary of a holding company
Typically, when you sell your company you will get a lump sum from which 33% is deducted due to Capital Gains Tax. However, if your company is owned through a holding company and you have shares in that holding company, then Capital Gains Tax is not applicable because the subsidiary is not personally owned. Of course, this means that the money you make from the sale of the entity goes to the holding company and not into your personal account. A business owner may choose this route so that they are not charged Capital Gains Tax, they can control the timing of when they pay income tax and they can use the money to invest or develop other businesses through their holding company.
Tax benefits for companies valued in excess of €1 million
Michael Ryan, Tax Specialist at Gara Ryan, has some great insights into how the holding company regime works in Ireland and how business owners can benefit from it. He says, “The holding company is an ideal structure for anybody who is involved in business and ideally for someone who is involved in more than one business. It works particularly well for businesses with a value that is well in excess of €1 million.” This is because companies that are worth up to €1 million can avail of Entrepreneur Relief which allows the owner to sell at a very attractive 10% tax rate. But for companies that are worth €4 million – €7 million it is a different story entirely.
The holding company is an ideal structure for anybody who is involved in business and ideally for someone who is involved in more than one business. It works particularly well for businesses with a value that is well in excess of €1 million.
“Selling a company of this value in the absence of a holding company means the shareholder has to pay 10% tax on the first million and then 33% tax on the balance. The higher the consideration goes, the higher the effective rate of tax,” Michael says, but the good news is that the leniency of the holding company regime in Ireland means that you may pay no tax at all. “If you use a holding company to sell the subsidiary, you’ll pay zero tax, with the only drawback being that the money is trapped in the company.”
Not sure if the tax benefit is worth it?
The real question is, would you rather sell a company at its value of €10 million, pay €3.3 million in tax and get only €6.7 million into your personal account or realise the full €10 million and have it in your holding company? In Michael’s experience, he has found that most entrepreneurs feel that they are able to grow €10 million easier than they could €6.7 million and, therefore, opt for the holding company option.
How to avail of holding company tax relief
There are three main conditions to availing of holding company tax relief:
- The holding company must have at least a 5% shareholding in the entity being sold.
- The company must have held that shareholding for at least 12 months prior to the disposal.
- The company being sold must be a trading company and not deriving its value from Irish land. This won’t work for a company owning Irish property, so for a hotel this could pose a problem due to most of the value of the company coming from the building itself. However, it is worth noting that some presale planning involving the hive out of the property and trade into separate entities could get around this issue.
What happens if you retain a percentage of individual shareholder ownership?
When it comes to how you decide to interpose a holding company between the shareholder and the trading company, you may decide you don’t want the holding company to have 100% ownership of the subsidiary. Why? By allowing the individual shareholder to own a direct shareholding of the trading company, at say 10% with the balance of the shares going to the holding company, you can get the best of both worlds. On the disposal of the company, the holding company will still have zero tax but now the individual shareholder can receive €1 million taxed at just 10%. However, if the individual owns more than 10% of the company, then the holding company will be liable for 1% stamp duty cost on acquiring the shares.
What happens next?
If you decide to avail of the tax benefits of the holding company structure, you may wonder what happens now that all your money is wrapped up in the company? Michael finds that most business owners use the funds for investment purposes, “I can think of one particular client that would have invested in a number of commercial properties through the company as well as loan note investments. Each year, they take out of the company what money they need to live by way of a dividend. They don’t take out more than what they need because that is subject to personal income tax.”
However, others would have a longer play that involves choosing to go abroad for a period of time with a view to losing Irish residency, liquidating the company and getting tax free cash. This involves going to a jurisdiction where you can become a tax resident in that country very quickly and are deemed to be a resident of that country rather than Ireland. For this to be worth your while, you would need to choose a jurisdiction that doesn’t tax on income from a foreign source!