Broadly speaking, a close company is a company under the control of 5 or fewer participators (including their associates), or of participators who are directors. The vast majority of companies registered for corporation tax in Ireland are "close companies".
There are specific rules in Irish tax law that are applicable to close companies. These rules are designed to ensure that persons who conduct certain activities and transactions through corporate structures do not receive an unfair tax advantage over persons who conduct similar activities and transactions without incorporating. The provisions seek to level the playing field between corporation tax, on the one hand, and personal income tax (where rates are generally higher) on the other. The close company surcharge of 20% applies in respect of investment income earned by a company, such as interest, dividend or rental income, which is not distributed to the company shareholders within 18 months of the company's year-end. The surcharge does not apply to the retained trading income of a close company. With investment and rental income of a company subject to tax at a 25% rate, there would be a strong incentive in the absence of a surcharge for persons to accumulate and retain such income within a company and thereby avoid marginal rate income tax and USC.
With regard to service companies (i.e. those that are engaged in professional services) that are close companies, the surcharge is extended to include a surcharge of 15% on 50% of trading profits which are not distributed within 18 months of the end of the accounting period. The activities of service companies are those that are typically carried on by an individual or partnership. Tax legislation does not define profession so it is given its ordinary meaning, taking into account relevant case law.
The service company surcharge was introduced in order to counteract an abuse whereby these activities were diverted to a company, being a company controlled by individuals who are actually providing the relevant services, and the income is withheld from distribution. In the absence of the service company surcharge, the profits would be taxed at the corporation tax rate and, if not distributed, would avoid the higher personal income tax charge. This would result in a loss of tax revenue and would give an unfair tax advantage to persons who structure their affairs through corporations. As the surcharge only applies to 50% of undistributed trading income, provision is made for retention and re-investment of profits within professional services companies.
Non-resident companies are not within the close company provisions.
