Dáil Éireann Debate, Tuesday - 16 July 2013
286. Deputy Pearse Doherty asked the Minister for Finance the current treatment of undistributed reserves in companies; if he will set out the revenue that could be raised for the Exchequer if the tax-free lump sum on retirement for directors, who withdrew them from the undistributed reserves, were reduced to €200,000 and capital acquisitions tax, at a rate of 40%, was applied to the remainder of the money drawn down. [35156/13]
View answerThe tax treatment of undistributed reserves in companies is dealt with by sections 440 and 441 of the Taxes Consolidation Act 1997. Section 440 provides for an additional charge of corporation tax (referred to as a surcharge) on undistributed investment and estate income of close companies. A close company will be liable to a surcharge of 20% on any investment and rental income that is not distributed within 18 months of the accounting period in which that income was earned. Section 441 provides for a similar surcharge of 15% on 50% of any trading or professional income of a professional service close company that is not distributed within 18 months of the relevant accounting period. €2,000 may be retained by a close company without incurring a surcharge.
A close company is a company under the control of five or fewer participators, or of more than five participators who are directors, including their associates. Broadly speaking, a participator is any person with a share or interest in the capital or income of a company. A service company is a close company whose business consists of carrying on a profession or providing professional services or which exercises an office or employment.
With regard to the treatment of tax free lump sums on retirement, I assume that the Deputy is referring to an ex-gratia lump sum which might be awarded out of company funds to a director on ending employment with a company and not a pension lump sum paid out of the director’s approved pension scheme.
Section 123 of the Taxes Consolidation Act 1997 imposes, (subject to a number of exemptions and reliefs provided under section 201 and Schedule 3 of that Act), a charge to income tax in respect of ex-gratia payments made by employers on the termination of an employment, where the payment would not otherwise be chargeable to income tax under general income tax law.
Statutory redundancy payments are exempt from income tax. In addition, ex-gratia redundancy payments or retirement gratuities in excess of the statutory redundancy amount can qualify for exemption, with the exempt amount varying according to the number of years service of the individual, the level of earnings in the last three years of employment and the individual’s entitlement to any tax-free lump sum from an approved pension scheme.
The maximum tax-free element of an ex-gratia payment made in respect of termination of an employment or office is limited to €200,000. This overall limit is a lifetime cap and applies in all cases other than where an ex-gratia payment is made on death or disability.
There is a separate, additional maximum lifetime tax-free limit of €200,000 on ex-gratia payments made on the death of an employee/director or where the payment is made solely on account of disability of, or injury to, the employee-director.
In the circumstances, charging the excess over €200,000 of any payment at a rate of 40% as capital acquisitions tax, rather than at the marginal income tax rate of 41% plus USC, would result in a loss to the Exchequer.
