Did you know that Ireland has a very generous holding company tax relief? Using a holding company structure can be a strategic way to manage and potentially reduce your capital gains tax (CGT) liability when selling a business. Smart business owners 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 corporation designed to own and manage shares or assets in other companies, called subsidiaries. The holding company may own various assets, including intellectual property, real estate, or investments. It does not directly conduct business operations but controls and oversees its subsidiaries’ strategic decisions and performance, including appointing directors and setting overarching policies.
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 a company, you will face a capital gains tax (CGT) liability of 33% on the gains realised from the sale. However, if your company is owned through a holding company, the holding company could potentially avoid CGT on the sale of the subsidiary’s shares, provided certain conditions are met.
This setup means that the sale proceeds go to the holding company rather than directly into your personal account. By using a holding company structure in this way, you are not be subject to immediate CGT on the sale. Instead, the holding company receives the funds, which can then be reinvested or used to develop other businesses.
The timing of when you pay income tax depends on how you choose to extract funds from the holding company. You can manage this by paying dividends or drawing salaries, allowing you to control the timing of personal income tax liabilities.
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 a 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.”
For companies where the gain is under €1 million, there is a less complicated way to bring your personal tax bill down. Entrepreneur Relief offers a reduced CGT rate of just 10% when an individual is disposing of their business assets up to a lifetime limit of €1 million. So, if you sold a business for €1 million, this would translate into an immediate saving of €230,000 off your CGT liability. For companies that being sold for a gain of many millions, the saving is capped and therefore a holding company is more interesting.
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?
For me, the choice is simple. Would you rather sell a company for €10 million, pay €3.3 million in tax and get only €6.7 million personally, or realise the full €10 million within your holding company? In Michael’s experience, he has found that most entrepreneurs find it easier to grow €10 million compared to €6.7 million and thus 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 in Ireland:
- The holding company must have at least a 5% shareholding in the subsidiary being sold.
- The holding company must have held that shareholding for at least 12 months before the sale.
- The subsidiary being sold must be a trading company and not deriving its value from Irish land. For example, a company owning Irish property, such as a hotel, might face issues if the property’s value significantly contributes to the company’s overall value. However, strategic pre-sale planning, like separating property and trading activities into different entities, might mitigate this issue.
What happens if you retain a percentage of individual shareholder ownership?
When deciding to place a holding company between the shareholder and the trading company, you might choose not to have the holding company own 100% of the subsidiary. For instance, allowing the individual shareholder to retain a direct 10% share in the trading company while the holding company owns the remaining 90% can offer dual benefits.
Upon the sale of the company, the holding company would still benefit from zero tax on the sale. Meanwhile, the individual shareholder could receive €1 million, which could be taxed at a lower rate, such as 10%. However, if the individual’s shareholding exceeds 10%, the holding company would be liable for 1% stamp duty 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 they need because that is subject to personal income tax.”
However, others might have a longer play that involves moving abroad for a period of time with a view to losing Irish tax 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 quickly and therefore be deemed to be a resident there rather than in Ireland. For this to be worth your while, you would need to choose a jurisdiction that doesn’t tax income from a foreign source!
