An Irish company buying back their shares can be a good strategy for succession planning, and also other situations such as the departure of a disgruntled shareholder, or a marriage break-up.  

From a tax perspective, any payment for the shares over and above the amount which the company received for a subscription of shares is treated as a distribution and subject to income tax for the shareholder at their marginal rates.  However, tax law provides that if certain conditions are met, 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
Sections 176 – 186 of the Taxes Consolidation Act 1997 (TCA 1997) contain the legislative provisions pertaining to share buybacks by unquoted companies. The main conditions for capital gains tax treatment are that:

1. the company must be a trading company or the holding company of a trading company;
2. 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;
3. the shareholder must own the shares for a period of at least five years ending on the date on which the disposal;
4. the share buyback must be for the benefit of the company’s trade;
5. 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;
6. 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 capital of the company).

For the purposes of tests 5 and 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.

Company filing requirements
Where a buyback is undertaken and the payment is not treated as a distribution, the company must return the details to Revenue using a Form AOS1.  This return is required at the same time as the Form CT1 for the accounting period in which the payment is made. A payment made by a company for the buyback 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 buyback 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 buyback 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.

Capital Gains Tax Retirement Relief
Retirement relief is a relief from CGT given to an individual aged 55 or over on the disposals of certain assets provided the conditions of the relief are satisfied.

An amendment to the retirement relief legislation under section 598 TCA 1998, introduced in Finance Act 2010, provides that an individual can come within the scope of the retirement relief provisions on the proceeds of a disposal of shares pursuant to redemption by a family company of its own shares. Therefore, if the conditions for capital gains tax treatment are met a shareholder may dispose of their shares to the family company and avail of retirement relief.

Finance Act 2012 introduced changes to retirement relief which applies to disposals made on or after 1 January 2014.  Essentially individuals seeking to avail of the relief will fall into two categories; those aged 55-65, and those aged 66 and over.  For individuals aged 55-65 relief is given if the consideration for the disposal of their shares does not exceed €750,000.  Individuals aged 66 and over who dispose of their shares can avail of the relief if the consideration does not exceed €500,000.   Marginal relief may be available in both circumstances which will limit the CGT to 50% of the excess proceeds above €750,000 or €500,000 whichever is applicable.

Stamp Duty
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 stated in their Stamp Duty Manual at Part 3;
“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 because it falls outside the scope of section 31 of the SDCA (stamp duty on contracts)”
It is understood that this stated Revenue position still applies.

Company Law
Some of the key company law requirements of undertaking a share buyback include:

• 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.

Conclusion
A company share buyback may be an attractive strategy to a shareholder wishing to end or reduce their involvement in a company, and if certain conditions are satisfied, such shareholder may be able to available of capital gains tax treatment on the share disposal.  Retirement relief may be available to relieve this charge to capital gains tax.   For a shareholder considering such a strategy, it is possible to obtain Revenue approval on the buyback and this added comfort is worth pursuing where possible.

Please see the following page for further details:  https://www.bjdennehy.ie/taxation/corporate-reorganisations-reconstructions/