In any corporate group structure, share disposals are a common event. The general understanding for Irish tax purposes is that a disposal of shares in a subsidiary by a parent company is exempt from tax, pursuant to what is known as the ‘Participation Exemption’ provided for in Section 626B TCA 1997 and Schedule 25 TCA 1997. While very often this is in fact the case, it should not be taken for granted that this common exemption in Irish tax legislation will apply in every case.
We have provided a short summary recap for both you and your clients to keep in mind when planning and creating a corporate group structure or where a structure already exists and a disposal/transaction event is expected.
The Irish Participation Exemption offers a significant tax benefit for corporate groups, providing relief from Irish capital gains tax (CGT) on the sale of shares in certain subsidiaries. This exemption is designed to encourage business investment and simplify the tax position of both multinational and Irish groups. However, it comes with a set of conditions that must be carefully considered.
Key Conditions (not exhaustive) for the Participation Exemption
- Qualifying Parent Company: The exemption applies to the sale of shares in a subsidiary where the parent company for a period ending not more than two years before the date of disposal, the parent company, either directly or indirectly:
- Holds at least 5% of the company’s ordinary share capital,
- Is beneficially entitled to at least 5% of the profits available for distribution to equity holders of the company, and
- Would be beneficially entitled to at least 5% of the assets available for distribution to equity holders on a winding up. - Trading Activity Requirement: The exemption applies only to shares in subsidiaries engaged in trading activities. The subsidiary must be a wholly or mainly trading company or part of a group which is a wholly or mainly trading group.
- Deriving its value: The shares being disposed of must not derive the greater part of their value from Irish-specified assets (i.e. Irish land, buildings or minerals etc.)
- Residency Conditions: The parent company must be resident in a member state of the EU or a country with which Ireland has a double taxation agreement.
For the parent test, it is important to note the definition of ordinary share capital in the TCA 1997. When creating a group structure or when preparing for a disposal of a shareholding – it is important to consider the impact different share classes and their associated rights attaching to each class could have on whether a particular shareholding qualifies as a parent company for the purposes of the Participation Exemption.
In addition, in respect of the trading requirement, the term wholly or mainly is not defined and is a question of fact rather than of meeting specified tests. As a broad rule of thumb, a >50% test is used. Consideration should be given to several factors, such as sources of income, activity, assets, number of employees and their roles etc. There are several other intricacies in the wording of this legislation which need careful consideration.
Navigating the Irish Participation Exemption requires a clear understanding of the key conditions and potential pitfalls. At OmniPro Tax and Legal, our tax experts have extensive experience advising on the application of Section 626B TCA 1997, helping businesses ensure they meet the necessary criteria to benefit from this exemption while avoiding common issues. Whether you or your clients are considering restructuring, planning a sale of shares, or need advice on compliance, we are here to provide expert guidance tailored to your business needs.
Contact us today to learn how we can help your business make the most of Ireland’s Participation Exemption and optimise your tax position.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.
