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Dáil Éireann debate -
Tuesday, 30 Sep 2003

Vol. 571 No. 1

Written Answers. - Tax Yield.

Joan Burton

Question:

337 Ms Burton asked the Minister for Finance if his attention has been drawn to the fact that, since 3 December 1997 when the capital gains tax was halved, management companies have been used by very wealthy people to avoid tax, the net benefit on liquidation being 14.5%, that is, ?145,000 on every ?1 million of profit; the total estimated loss of revenue to the Exchequer from this device; if he has plans to close off this loophole; if he will consider a surcharge on the liquidation of such companies; and if he will make a statement on the matter. [21058/03]

It is not clear as to the basis for the figure of 14.5% referred to in the Deputy's question. When a company goes into liquidation – whether a management company or any other type of company – a distribution made by the liquidator to the shareholders, in the form of cash or other assets, is effectively treated as a disposal of the company's shares for capital gains tax purposes. It follows that the 20% rate of capital gains tax applies in such circumstances.

Any accumulated profits giving rise to funds available for distribution in a liquidation situation would currently suffer corporation tax at either 12.5% or 25%, depending on whether the profits are considered to arise from trading or non-trading activities. In the case of service companies, that is, companies providing employment or professional services, the profits may also have attracted an additional surcharge of 15% to the extent that they were not distributed within a certain period and where the companies were, in broad terms, controlled by five or less individuals. Where a management company receives fees from a connected company, in order to be allowable for tax purposes the management service must be genuinely provided and the charge for the service must be realistic by reference to similar services provided at arms length in that sector.
I am informed by the Revenue Commissioners that while they are investigating one particular group of companies involving the use of a management company and a subsequent liquidation, at present they do not have indications of widespread use of avoidance schemes in this area. However, the matter will be kept under continual close review and I will, of course, consider introducing appropriate anti-avoidance measures if evidence emerges of any significant abuse, in line with what I have done on several occasions in the last few years to counter such abuses.
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