It has become increasingly common for private Irish wealth to be managed within an Irish corporate structure.
This may not necessarily happen by design. A typical example is where a Founder owned their business via an Irish holding company. The business sale can generate proceeds, usually tax free, in the holding company. These proceeds will generally be left within that structure and investments made via that corporate. Another more recent common scenario is business owners repatriating foreign corporate wealth back to Ireland for example, from Malta or Isle of Man.
An individual can also set up a company to manage wealth as an investment vehicle. This can be efficient but will not be for everyone and can sometimes be costly. It generally suits cases where an Irish individual has enough resources personally and is ok with the concept of money "being stuck" in a company. This may not necessarily be the case, but it would be wise to assume this at the outset. If there is a need to have personal access to the investment in the short term, a company would usually not be practical option.
Irish tax position
The Irish tax on investment returns within an Irish company will depend on number of factors. Sometimes the tax will be the same as if the profit had been made by an individual. And sometimes an investment by a company may offer a tax exemption or a lower tax rate. As ever, it will depend on the nature of the asset and indeed the activity of the company. Here is an outline of the type of direct tax issues that can be relevant here for the company.
Personal ownership…
Personal ownership can also be efficient where:
An individual has capital losses forward or about to be triggered or
For foreign investments which trigger significant foreign taxes. Foreign tax may be available to offset or eliminate completely Irish personal income tax, whereas the impact in a corporate could be limited due to the low corporate tax rate.
Trading or Investment
At the outset the most important aspect is whether the profits derive from trading or investment activities.
(1) Trading activities
For an Irish company, tax tends to be less problematic for trading activities. The rate is 12.5% on profits and the calculation is relatively straightforward. Indeed, it should be familiar to every trading company in the country, whatever their activity.
The taxable profits of the dealing trade will be based on the profits calculated for accounting purposes. For this business, such profits generally comprise dividends, movement in market value of assets and foreign exchange fluctuations. A deduction will be available for costs such as annual fees, salaries to manage the portfolio, office expenses. There are specific tax rules which need to be taken into account but these do not tend to materially change the results – for example, disallowance for business entertainment, certain donations, accounting depreciation.
Clients should be aware that movements in the value of trading assets are usually recognized for tax purposes (as it will follow accounting practice). This could mean that tax (at 12.5%) arises on uplift even when the asset is not be sold by the company. Conversely the tax benefit of an unrealised loss should be available, again even though the asset is not sold.
For private wealth management companies, the main sensitivity is determining whether a trade is actually carried out for tax purposes.
This is generally a once off exercise but should be revaluated if there are any significant changes. As wealth management is typically of an investment character, trading status can be regarded as difficult to achieve. At the very least, there should be a profit motive with a clear, organized and deliberate strategy behind it.
It can be common for trading companies can also have a mixture of activities–some assets may be held as dealing and others as a longer-term investment. For the latter, then the tax approach as set out for investments at (2) will apply. However, it can often be preferable to isolate pure investments in a separate group company. This will be simpler and by default also add some internal compliance discipline to an investment decision process.
For all significant investment decisions, the option to invest personally should be considered alongside the corporate investment option. This is particularly true where the company is not itself trading. An investment by an individual can sometimes have the same tax cost on exit as that by a company, especially if foreign taxes are included. And as a rule of thumb, if an investor has the personal resources then they should proceed with personal rather than corporate ownership in that scenario.
Determining whether trade exists
In managing wealth, trading is not so simple
It is likely that a company with an employee full time managing an active financial portfolio would satisfy the ‘trading’ categorization. Engaging an independent stockbroker or managing the portfolio on a part-time basis in-house should not preclude trading status either. It will all depend on the facts such as how many trades are turned over, holding period, categorisation of assets.
Determining whether a trade is carried out for tax purposes is an age-old question. Tax legislation does not provide any guidance of note. Deciding whether certain activities constitute trading involves having regard to the broad concepts known as Badges of Trade which were published back in the 1950s and are still used today. One must also consider case law precedents and indeed there has been some recent UK cases of note here. Irish Revenue have published some summary guidance and a list summarising their opinions on specific cases. It is generally understood that a lot of these opinions relate to branches of multinationals.
(2) Investment activities by a company
The Irish tax analysis for non trading activities is more complex and needs to be considered for each investment. Here are the basics:
Income received is taxable at 25%. Such income can include foreign dividends, loan note coupons, interest.
All realized gains are taxable at the general Capital Gains Tax rate, currently 33%.
However, there are a lot of specific tax rules which can kick in depending on the nature of the asset or the income or profit. For example:
The gain on disposal of shares in a 5% plus investment in an Irish or foreign trading company can be tax exempt – via Ireland’s Participation Exemption. Such investments could comprise longer term angel type holdings where intention is for a full exit after at least a year.
The receipt of Irish dividend income is exempt (but see comments below on surcharge). Whilst foreign dividends are taxable at 25%, a credit may be available for underlying tax. It may also be possible to receive foreign tax credits to offset or eliminate entirely the Irish tax here.
Specific tax rules can apply for investments in regulated funds and in entities based in countries which do not have a Tax Treaty with Ireland (such as Cayman) i.e. offshore funds. Each would need to be analysed at the outset and the Irish tax class determined. Here are just some nuances for corporate investors:
Gains can be taxable at 25% (rather than 33%)
There can be a restriction on use of losses
Deemed disposals arise for tax purposes on long term holdings of certain regulated investments. This would require monitoring and subject to default high penalties if it is not correctly disclosed in the tax return.
If a company is dealing in such assets (see 1 above) then generally the above considerations would not apply. A holding of offshore products may be treated differently in certain circumstances.
Tax is calculated by reference to euro values. Foreign currency fluctuations can also have a real tax impact – for example, holding US dollar in a bank account would be regarded as a taxable asset. Withdrawals would constitute a taxable disposal by calculation of euro difference. This may not be the intention. Investment in shares in non euro currency will trigger tax on foreign exchange on share sale. This event will then result in holding of non euro cash which again triggers tax on foreign exchange when disposed of. Such a disposal can be a conversion to euro or indeed, purchase of a different investment.
The above just outlines some common tax matters. Tax input would need to be obtained in respect of each specific unique investment to determine treatment. Whilst some may be straightforward such as quoted equities, other investments such as foreign funds are not. This can be a deciding factor as to how investments are structured. For example, if intention is to invest in equities there could be very different tax result even if underlying commercials are similar. For example separate investments in various US quoted shares could be very different for tax compared to a single wrapper product like a ETF holding basket of such shares – especially when foreign tax relief is considered.
Close company (private company) considerations
Irish tax laws have additional rules for private companies. The most important here is a surcharge which imposes a further tax at 20% on certain undistributed profits. This will generally result in an effective 40% tax rate. It may not be always applicable and here are the basics:
The 20% surcharge mainly applies to investment income i.e. Irish dividends and income subject to the 25% rate. It does not apply to capital gains taxable at 33%; it may however apply to profits from certain offshore funds. The surcharge does not apply to share dealing profits subject to the 12.5% rate.
The surcharge does not apply to the extent the income is distributed and this can be currently managed within corporate groups.
For “professional services” companies, a separate surcharge applies to undistributed trade profits. A company dealing in or managing shares/financial products or managing such holdings should not be regarded as carrying out professional services.
Managing wealth in an Irish resident company
Liability limited is usually a main draw for setting up a company. This protection comes with the requirement for annual accounts to be publicly available (now really regardless of how structured). A fully unlimited liability corporate structure removes the publication requirement. The choice for the owner is down to commercial preference. Liability protection is a more significant issue for (say) a customer focused trading operation than an investment/cash box company.
Summary
The tax needs to be properly considered before making each investment so at a minimum it can be factored in or structured so that it is most efficient. Sometimes wealth is within a company from the outset so flexibility here is somewhat limited.
Where wealth is held personally then a company should be default option where there will be significant engagement in managing a portfolio, such that it is a trade.
There will be other aspects to consider outside of the bubble of the corporate – for example, whether other family members should become co-investors and indeed the ultimate exit plan if required.
This article concentrates on ‘paper investments’ and real property will have its own particular nuances.
