Acquisition 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 buy-back its own shares is a useful mechanism for Irish businesses. However, where a company acquires its own shares any amount paid in excess of the original issue price is treated as a distribution by virtue of Section 130 TCA 1997.

Chapter 9, Part 6 TCA 1997 permits capital gains tax treatment where the following conditions are met:

1. The company purchasing its own shares must be an unquoted trading company or the unquoted holding company of a trading group.
2. Payments made on or after 26 March, 1997 by a quoted company on the redemption, repayment or purchase of its own shares, will also fall within these provisions.
3. The redemption, repayment or purchase must be made wholly or mainly for the benefit of the company’s trade or the trade of a 51 per cent subsidiary.
4. The redemption, repayment or purchase must not be part of any scheme the purpose of which is to enable the owner of the shares to participate in profits without receiving a dividend.
5. The vendor must be resident and ordinarily resident in the State.
6. The vendor must have owned or be deemed to have owned the shares for at least 5 years (except in the case of inherited shares when 3 years is sufficient)
7. There must have been a proportionate 25 per cent reduction in the vendor’s interest in:

a. the issued share capital, and,
b. the distributable profits of the company and, where appropriate, of the group of which the company is a member.

8. The vendor must not be connected (as defined by section 186) with the company immediately after the purchase.

The conditions set out in (2) to (8) above need not be met where the person to whom the payment is made applies the payment to discharge inheritance tax or a debt incurred for the purposes of discharging inheritance tax in respect of those shares.

To qualify, the payment must be applied within 4 months of the valuation date in discharging the inheritance tax itself or within one week of the date the payment is made if it is applied in discharging a debt so incurred.

It must also be shown that undue hardship would have been caused in otherwise discharging the inheritance tax.

Purchase of shares of parent company

A payment by a company for shares of its parent will qualify for capital gains tax treatment if the payment would have so qualified had it been made by the parent itself for those shares.

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