Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

I move amendment No. 38:

In page 34, between lines 37 and 38, to insert the following:

“Amendment of section 135 of Principal Act (distributions: supplemental)

20. (1) Section 135 of the Principal Act is amended—

(a) by inserting the following subsection after subsection (2)—

“(2A) No consideration derived from any share capital or security of a company (being a close company within the meaning of section 430 and in this subsection referred to as the ‘first-mentioned company’) issued to another company (being a close company within the meaning of section 430 and in this subsection referred to as the ‘second-mentioned company’) in exchange for the issue of shares or securities by the second-mentioned company shall be regarded for the purposes of this Chapter as new consideration received by the second-mentioned company in so far as it exceeds any new consideration received by the first-mentioned company for the issue of the said share capital or security.”,

and

(b) by inserting the following subsection after subsection (3)—

“(3A) Where a member of a company (being a close company within the meaning of section 430 and in this subsection referred to as the ‘first-mentioned company’), or a person connected with that member, enters into arrangements directly or indirectly with another company (being a close company within the meaning of section 430 and in this subsection referred to as the ‘second-mentioned company’), whereby a member (in this subsection referred to as the ‘disposing member’), of the first-mentioned company disposes of an interest in shares or securities of the first-mentioned company and the consideration for the acquisition of those shares or securities is paid or to be paid directly or indirectly out of the assets of the first-mentioned company, any amount received directly or indirectly by the disposing member from the second-mentioned company in respect of the disposal shall be treated for the purposes of this Chapter as a distribution made by the first-mentioned company to that member at the time of the payment by the second-mentioned company, and this subsection shall apply however many companies participate in the arrangements.”.

(2) This section shall come into operation on 2 November 2017.”.

These amendments form a package of anti-avoidance measures being introduced to deal with a number of specific tax avoidance schemes which have been uncovered by the Revenue Commissioners. Essentially, these schemes involve converting what should be taxable income payments into capital payments to avail of the lower capital gains tax rates. The potential charge to capital gains tax is then often avoided by the use of CGT reliefs such as retirement relief and entrepreneurial relief, resulting in funds being extracted by shareholders entirely tax free or at a significantly reduced tax liability. It is unfair that some individuals are engaging in these tax avoidance structures solely to take advantage of lower tax rates. This leads to unfair outcomes and puts other taxpayers who do not engage in such avoidance arrangements at a competitive disadvantage. I am, therefore, taking steps to counter these avoidance schemes.

I am amending the distribution rules in section 135 of the Taxes Consolidation Act 1997 for determining whether an amount is to be treated as a distribution of income for tax purposes. The first amendment deals with a scheme which has been exploited by taxpayers in order to generate new capital in a company, without investing any fresh capital, so as to enable income to be turned into capital on a subsequent repayment of the share capital. The distribution rules are being amended to ensure that any artificially generated capital will be properly subject to income tax when it is subsequently distributed to shareholders.

The second amendment to section 135 deals with another scheme identified by Revenue, which seeks to avoid a liability to income tax where a company indirectly buys back shares from a shareholder. The provisions are being amended to ensure that distribution treatment correctly applies.

I am also bringing forward proposals to amend the capital gains tax provisions in order to restrict the availability of CGT relief in respect of certain connected party transactions by individuals. This follows the identification by Revenue of three specific avoidance schemes in operation involving the disposal of assets to connected parties by individuals, without any change in the underlying beneficial ownership of the asset, in order to extract cash from a business in a tax free manner.

I am therefore restricting the availability of retirement relief and the revised entrepreneur relief in respect of such connected party transactions. In addition, an amendment is being introduced in relation to inter-family disposals of shares and securities to ensure that the maximum tax-free threshold, which is laid down in the legislation, cannot be circumvented.