Ta xation Group Restructuring
Group Restructurings
Paul Dillon outlines the complexities involved in a group restructuring and the actions
that should be taken
company holds valuable property
assets which are worth significantly
more that the trade that operates from
within the premises. The shareholders
may wish to separate trading and
investment assets to protect these
assets and allow either the trade or
investment property to be disposed of
separately.
* Separate different trades – can facilitate
CAT planning – this is particularly
relevant where several trades are being
carried on by one company and the
founders wish to separate the trades to
facilitate new successors taking over the
business.
Introduction
Corporate restructurings involve the transfer
of trades from one company to another
company.
The transfer can involve transferring the
trade from one company to a separate
company held directly by the same
shareholders (hive-out) or may involve the
transfer of trade from subsidiary to holding
company (hive-up) or transfer of the trade
downwards (hive-down).
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* Consolidate and simplify group
structures- many groups have evolved
over time and many companies that
existed are no longer relevant and just
contribute to a significant compliance
cost to the group. A group restructuring
allows a simplification of the structure
and a reduced compliance cost on the
business.
In this article, I will outline briefly the various
tax and legal and accountancy issues that
arise with group restructurings. Given the
complex nature of these transactions, it is
imperative that professional advice is
obtained.
Taxation Consequences of
Restructuring
The reasons for restructuring can include
the following:
Under corporate restructuring, liabilities to
tax can potentially arise under a number of
different tax heads, including the following:
* Separate valuable assets from trades –
this is particularly relevant where a
* Capital Gains Tax for companies, if
Ta xation Group Restructuring
trades and
transferred
properties
are
being
* Corporation Tax for companies, where
assets on which capital allowances
were claimed are transferred.
* Capital Gains tax for shareholders, if
shares are being sold or swapped.
* Stamp Duty for companies where
assets are being transferred.
“Relief however is available under S615 TCA 1997 in
the case of a hive-out, which can be used to avoid a
CGT liability on the transfer of any chargeable assets
such as the building and goodwill.”
There are a number of tax reliefs available
for restructuring undertaken for bona fide
commercial purposes. The principle reliefs are
as follow:
* Relief from Capital Gains tax on transfer
of
assets
under
company
reconstruction or amalgamation ( S.615
TCA 1997) in the case of a hive out or
S.617 TCA 1997 in the case of hive-up
hive down).
* Relief allowing transfer of capital
allowances and losses from the existing
company to the new company ( S. 400
& S.312 TCA 1997).
* Relief from Capital Gains tax for
shareholders
on
company
reconstructions and amalgamations.
(Section 587 TCA 1997).
* Relief from stamp duty in a
reconstruction or amalgamation (S.80
SDCA 1999) in the case of a hive-out
or S.79 SD CA 1999 in the case of a
hive-up.
The conditions for availing of these reliefs
vary significantly and all therefore need to be
considered carefully.
Capital Gains Tax
Capital Gains can arise on the transfer of
chargeable assets from one company to
another. As in a restructuring transaction, the
transferor and the transferee are usually
connected companies; the gain would be
computed on the basis of the market value of
the asset transferred, regardless of
consideration passing, if any.
Relief however is available under S615 TCA
1997 in the case of a hive-out, which can be
used to avoid a CGT liability on the transfer of
any chargeable assets such as the building
and goodwill. The company which is acquiring
the trade steps into the shoes of the Oldco
and is deemed to acquire the assets at same
acquisition date and cost as the Oldco.
In order for the relief to be available in the
case of company reconstructions, there are
various conditions to be satisfied. The relief
applies where:
* Any scheme of reconstruction or
amalgamation involves the transfer of
the whole or part of a company’s
business to another company;
* At the time of the transfer both
companies are resident in the state;
and,
* The first mentioned company receives
no part of the consideration for the
transfer (otherwise than by the other
company taking over the whole or part
of liabilities of the business).
The relief does not apply to transfer of
trading stock.
Where the S615 relief is utilised, the two
companies are treated as if any assets
transferred are acquired by the transferee
company (the Newco) from the other
company for a consideration that would result
in neither a gain or loss arising to the
company making the disposal i.e. no CGT
arises on transfer. The acquiring company is
treated as if assets acquired at the date and
cost that the transferor company acquired
them.
In the case of a hive-up or down, relief is
available under S.617 TCA 1997, it is
important to note that if a trade is transferred
inter group that they are claw back provisions
if the company that receives assets by way of
intergroup transfer leaves the group or is sold.
Relief from stamp duty in a reconstruction
or amalgamation (S.80 SDCA 1999)
Stamp Duty can arise of the transfer of
assets, goodwill, trade debtors from one
company to another. Stamp Duty rate can be
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Ta xation Group Restructuring
as high as 9% on the value of property transferred
Relief is available from stamp duty in the case
of certain reconstructions/amalgamations i.e. hiveups and down. The transfer from Oldco to the
Newco is termed a share for undertaking-three
party swap for stamp duty purposes.
Relief from stamp Duty is available under
section 80 SDCA 1999 in the case of a hive out:
* A bona fide scheme for reconstructions or
for amalgamation i.e. for bona fide
commercial purposes.
* Relief applies to Irish & EU registered
companies
* The acquiring company i.e. the Newco must
be duly authorised to acquire all of part of
the
undertaking
of
Oldco.
The
Memorandum of Association of the new
companies must have as one of its
objectives, the acquisition of the respective
undertaking i.e. trade of the Oldco.
* The acquiring company must have acquired
all or part of the undertaking of the other
company after the transaction has been
completed at least 90% in the current
transaction.
* The consideration for the acquisition
(except such as consists of the assumption
of discharge of the liabilities of the target
company by the acquiring company) must
consist as to not less than 90% in the issue
of shares by the acquiring company i.e. cash
not to exceed 10% of total value of the
consideration.
* The transactions would require adjudication
by the Stamps Branch of the Revenue
Commissioners.
* A statutory declaration is also required from
an officer of the company or a solicitor,
confirming all the conditions have been
met.
* There is also a requirement regarding
substantial identity” in that- The same business must be carried on by the
acquiring company after the reconstruction as
was previously carried out by target company
prior to the reconstruction; and,
- The acquiring company must be owned by
substantially the same owners as the target
company prior to the reconstruction.
In the case of a hive up or hive down relief is
available under section 79 SDCA 1999. There
must be a 90% control relationship between the
transferor and transferee and the relationship
must remain for two years after the transfer
otherwise any stamp duty relief will be lost.
Relief allowing transfer of capital allowances
and losses from the existing company to the new
company ( S. 400 & S.312 TCA 1997)
Normally a transfer of a trade is deemed a
cessation and the company ceasing to trade is
entitled to terminal loss relief.
The trading losses of the existing company can
be transferred to the Newco under section
400TCA 1997 provided is that there is a 75%
common identity of ownership between the
transferor company and the transferee company
and that the same trade is carried on by the
transferee company.
Plant and machinery can be transferred at tax
written down value without triggering a balancing
charge/ balancing allowance in the transferee
company.
It is important to note that it is trading losses
that are covered by this provision and not other
losses such as rental income losses.
Relief from Capital Gains Tax for Shareholders
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Ta xation Group Restructuring
on Company reconstructions and amalgamations
( S.587)
In the case of a hive-out the shareholders will
receive shares in the Newco in exchange for the
older company, they could be considered to
have made a disposal.
Relief however is available under S.587 from
CGT where share are issued under a bona fide
reconstruction which is effected for commercial
reasons and does not form part of any
arrangement or scheme of which the main
purpose is avoidance of tax.
VAT
No VAT should arise on the transfer of the
assets from one company to another as the
transfers will take place in connection with the
transfer of a trade from one taxable person to
another.
“As this article demonstrates there are several complex
tax, accountancy and legal issues that need to be
addressed before undertaking a group restructuring.”
Other taxation/practice issues
* It is advisable to get prior Revenue
clearance before undertaking a group
restructuring to ensure that all conditions
for relief are met.
* A CGT clearance for the transfer is
necessary.
* In the case of a hive-out, the Newco
should be registered for corporation tax,
VAT and PAYE.
* The employees that need to be transferred
to the new company need to be informed
of their change of employer and
confirming that their statutory and legal
entitlements have not or will not be
effected by the transfer. Revenue will
concessionally allow the transfer of staff
without the requirement to issue a P45.
Revenue can then issue new tax free
allowance certificates to Newco.
* You should discuss the restructuring with
your bank manager in order to obtain new
bank accounts and transfer existing
facilities to the new company which is to
carry out the trade.
* The customers suppliers need to be
informed also as company registration
numbers and VAT numbers will have
changed.
Legal Aspects of Restructuring
It is important to ensure that the company has
sufficient distributable reserves to ensure that the
restructuring does not result in a breach of S.45
Companies Amendment Act 1983.
There has been much legal debate whether
the assets should be transferred at market value
or book value.
If assets had to be transferred at market value
many companies would be unable to undertake
a group restructuring as they would have
insufficient reserves to effect
Recent legal opinion would now suggest that
the assets can be transferred at book value i.e.
the value which the assets are recorded in the
company’s financial statements.
Accountancy
The firms (i.e. Oldco’s) auditors will have to
confirm in writing that the company has sufficient
reserves to allow the restructuring to take place
in the case of a hive out
There are significant disclosure requirements
that need to be made in both companies
financial statements i.e. the Oldco and the
Newco as a result of any restructuring and these
should be discussed in detail with your auditors
before
Summary
As this article demonstrates there are several
complex tax, accountancy and legal issues that
need to be addressed before undertaking a
group restructuring. Prior revenue clearance
should be obtained and the matter should be
discussed with all parties involved i.e.
employees, suppliers, customers, financial
institutions.
Paul Dillon is Tax Director with PKF Ryan
Glennon.
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