Share buybacks are a regularly used means for retiring shareholders to step away from their companies whilst receiving some reward for their years of work. As part of the share buyback transaction, there is often the intention for a child to continue the business within the company. In addition, a share buyback transaction can also be considered where there are disgruntled shareholders in a company. From our experience, however, the various tax and company law considerations surrounding such transactions are often overlooked or not fully appreciated by clients.

We have summarised below some issues which often arise in these types of transactions.

For the exiting individual shareholder

It is often expected that CGT treatment applies automatically on a share buyback transaction. However, this is not necessarily the case.

In the first instance for a close company, any distribution made by the close company to its shareholders is normally treated as an income distribution and is liable to income tax/PRSI/USC in the hands of the shareholders (payment made in excess of the amount subscribed for the shares as a general rule).

For CGT treatment to apply, the conditions set out in Sections 176 – 186 TCA 1997 must be satisfied. We have outlined below the key conditions as a starting position when you are advising clients on this issue.

The key conditions for CGT treatment to apply in respect of a share buyback transaction are as follows:

1. The shareholder whose shares are being bought back must be resident and ordinarily resident in Ireland for the tax year in which the purchase is made.

1. The shares must have been owned for a period of at least 5 years (or 2 years if the shares are being inherited).

1. The shareholder’s interest in the company immediately after the purchase must be substantially reduced.

1. The company must be an unquoted trading company, and the company must be considered to be wholly or mainly a trading company.

1. The shareholder must no longer be connected (connection test) with the company (after the buyback).

1. In a group situation, there is a requirement that the holding company owns at least 51% of the share capital of the subsidiaries.

1. The redemption/buyback of shares is made wholly or mainly to benefit the trade carried on by the company.

1. The redemption does not form part of a scheme or arrangement, the main purpose or one of the main purposes of which is to enable the owner of the shares to share in the profits of the company without receiving a dividend.

As can be appreciated from the above, there are significant conditions to satisfy for a share buyback payment to come within the scope of CGT and not income tax treatment. On limited occasions, it can be beneficial for an income event to arise.

Once the parties are satisfied that CGT treatment can apply, then a detailed assessment of the CGT reliefs is required prior to making a claim for Retirement Relief and/or Revised Entrepreneur Relief. The impact of chargeable non-business assess has on the relief is regularly overlooked. In respect of Revised Entrepreneur Relief, the existence of excess cash, investments, and other non-trading items can impact the availability of the relief, depending on the extent of the same. In addition, the interaction of the two reliefs is important to assess as they can both apply to the same disposal transaction.

A share buyback transaction regularly forms part of an overall family succession plan for the company. In circumstances where a child is taking over the running of the company, Business Relief for Capital Acquisitions Tax purposes is a relief which is often claimed, which reduces the taxable value of relevant business property by 90%. Similar to the CGT reliefs above, the existence of non-trade-related assets and business activities has an impact on the extent of the relief claim.

A share buyback is also often implemented in circumstances where there is a desire for a disgruntled shareholder to exit the company. Where the conditions are satisfied, this can provide a mechanism for such a shareholder to exit in a manner which benefits all parties. Where the conditions for CGT treatment can be met, this process can facilitate a discontented shareholder exiting the company, allowing the company to trade successfully going forward without that shareholder’s dissenting views.

If your clients need help in this area, our OmniPro Tax and Legal Team is here to advise you on whether a client’s specific circumstances fall within the scope of CGT treatment on a share buyback, including a review of the reliefs that may be available. In addition, share buybacks are often considered as part of a succession plan to the next generation, and we can assist with advising on how to structure such a transition in a tax-efficient manner, which would include a review of whether any CGT or CAT reliefs can apply to the situation.

Here at OmniPro Tax and Legal Limited, we pride ourselves on not only being able to advise on the tax aspects of the structure, but also advise and prepare the paperwork to implement the plan, to include how it might be accounted for (we are there to ensure that the transaction is implemented correctly). We can also prepare a valuation to support the price payable, as this aspect is just as important.

If you would like to speak to one of the team regarding this, please do not hesitate to get in contact with us using the button below. Our experienced team is ready to assist you and provide personalised guidance and tailored solutions to meet your clients’ needs.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The authors accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.