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Company Restructuring and Cash Extraction

Welcome to Query Of The Week

We were recently contacted by an accountant who had a client who had excess cash in a company who was carrying on trade. The client wanted to invest some of this cash excess in property and maintain some of the excess cash outside the trade as protection. Further to this, they wanted to be able to loan money between the investment company and the training company if the need arose in the future. John analyses a solution to this question in this video.

The Company Law and Taxation impacts on Group Restructuring for Irish Groups

If this Query Of The Week was of interest to you, you will also be interested in our The Company Law and Taxation impacts on Group Restructuring for Irish Groups online CPD course.

Full details for this online CPD course can be found here.

CPD Allocation 1 Hour
Fee €20 (or 1 CPD Club points)
Presenter John Murphy – OmniPro
Category Financial Reporting

Query Of The Week – Video Transcript

(Please note that this is a direct unedited transcript of the spoken word as recorded on the video) 

Hello and welcome to this week’s Query Of The Week.

So, the question in this particular case was from a client who asked well, “I have a company, “it has excess cash, it also has a trade.” The client is wanting really to invest some of this cash excess cash in, in property and maybe maintain some of the excess cash outside of the trade because if it’s kept there, there’s a risk that the trade could bring down the excess in the investment properties. And they will also like to be able to loan the money between, let’s say, any cash or investment property company and the trading company, so that, you know, and to do that obviously it has to be done in compliance with company law.

So one possible mechanism, to do that would be to create a group structure. So there are various reliefs in tax legislation to permit the creation of a group. So if we just look on screen here at a drawing I’ve done just beforehand, you can see I’m not the best at writing on the screen but hopefully, you’ll get the point here. So, here, this particular case we have, will just like to query Mister X owning Company A. Company A has cash and trade, trade assets, excess cash assets, as he said, they want to use that cash for investment properties, purposes now.

But they’d still like to be able to loan money between them, so. You know, doing it say well, on this basis it’s probably a good idea to create a group. The key thing, there’s a release here, but the key thing for these releases is that there must be a bonafide commercial reason for doing the transaction, and it can’t, and one of the main purposes can’t be the avoidance of tax. So always keep that in your head. So on this particular case, what we’d be seeing is, in this particular case, would be to create a new company which is owned by Mister X, initially.

Then, subsequent to that, New Co offers to purchase the shares from Mister X that he owns in Company A, in return for Mister X receiving shares in New Co. So effectively, you can see this person, same person that own the company, Company A, now owns the new hold co. So the proportions haven’t changed and that’s required for some of the release. So, this particular case now, at the end of the day we have a new hold co, which owns Company A. So now, we can, say they run up money, up to New Co.

You can do that, you know, you can make the Section 4343A election so that it’s not surchargeable in New Co, assuming that company is a trading company. And from there, they can make their investments or deal with the excess cash in relation to that from that perspective. So what release, from a tax perspective, are we looking at here? So Mister X here, initially owned Company A. So he’s disposing of his interest there over to New Hold Co, so technically there’s a CGT there.

But Section 584586 relieves the CGT there such that the base cost moves over to Mister X’s new shares that he was issued in New Co at that point in time. So that deals with the CGT for Mister X. Also during this, New Co is exposed to Stamp Duty potentially because they’re buying shares, so Stamp Duty is obviously, it’s going to be a share transfer done, so it’ll be Stamp Duty. But Section 80 relief applies here, in this particular case now. Whereby, once you claim the relief, you submit your Stamp Duty form and claim the Section 80 relief because you’ve maintained the same proportions there has been any cash element. Mainly you’ve acquired more than 90% of the company, in that particular case there is no Stamp Duty arising in that particular transaction.

Next, well just in relation to CGT treatments for Mister X, coming back to that. It was important that New Co got control of the company. Which he did, he got 100% of the shares at Company A on acquisition in this particular case. From a company secretarial point of view then, what you need to consider, well New Co is now, is acquiring Company A. So, that there is a connected company, so you need to make there is an ordinary resolution done as required by Section 238, to permit the acquisition of Company A. So that needs to be carried out. You know and New Co would have a board meeting detailing the fact that they’re going to acquire these shares in relation to, of Company A and the reason for it.

You know, it’s for the benefit of the company in relation to us. And they’ll agree that they’ll do an offer letter to Mister X, the owner of Company A, in order to acquire those shares. Company A will then have a board meeting discussing the fact that, you know, that there’s going to be a transfer here, it is in the best interest of the company, in this particular case. So then, you know, once that’s done, New Co sent out the offer letter and Mister X, and that offer letter is conditioned on obtaining control, Mister X signs the offer letter. Then you do your share transfer form, you go through your normal company secretarial procedures for that, in that regard. So you can see here, just as it was for the New Co.

If it’s a DAC let’s say, in order to get the Stamp Duty relief, what will need to happen is that there will be specific objects need to, object tasks need to be put into a DAC memo or an article associations stating that the purpose of the company was to acquire the shares of Company A, That’s required in order to get the Section 80 relief. If you’re an LTD, you know, you don’t have it or you can’t have it in objects and you don’t have it in objects, in that particular case what revenue is set in Finance Act is that, as well as the issue, and that’s of the shares, Act covers off the requirement for Section 80.

But I know some people still do like to increase their authorized share capital potentially, saying that the authorized share capital is increased in order to acquire Company A in this particular case, so that it’s set in stone. But that’s no longer specifically required. So you can see here, you know, it’s not an overly complex transaction. There are a lot of reliefs involved in order to be no tax consequences ever. Now after the transaction, you know, Company A could pay up any excess cash through dividends. New Co can invest them, there’s no risk that the investment or the cash up in New Co will be at risk if Company A fails because it’s separate and that is separate from Company A in this particular case.