Dr. Brian Keegan:

There is no distinction in company law between a close company and an ordinary company.

A close company is purely a tax distinction. It relates, fundamentally, to the number of shareholders, that is, five or fewer. The idea behind a close company is to ensure that individuals do not put their businesses through as a company and avail of a 12.5% rate instead of a 40% rate. The laws are almost penal and are designed to ensure that if someone is incorporating a business in Ireland, he or she has to have very good commercial reasons to use a company structure and should not be doing so for tax purposes. There are special rules to do with leaving moneys in the company whereby if they are not distributed out, they are surcharged. There are special rules on how much money a director or shareholder can take out of the company without a tax penalty and so on. The combined effect of all those rules is that it is much more efficient for close companies to pay out their profits by way of salaries to the participators. Therefore, those profits, which one might expect to be taxed under corporation tax rules, are actually taxed under the income tax rules because they are paid out by way of salary or ultimately, by way of dividend. That happens because it is tax inefficient to do otherwise because the tax system is designed to ensure it is inefficient to do otherwise. The consequence of that is that the bulk of corporation tax is paid by more widely held companies which typically, by definition, are bigger companies. They tend to be multinationals and they tend to be publicly quoted. Due to the nature of the economic environment in which we all find ourselves, an increasing amount of the value and profitability of the corporate sector is derived from intellectual property. By contrast, 100 years ago the profitability of the corporate sector was mainly derived from the holding of natural resources. Things have moved on and it is those industries which have a very high reliance on intellectual property, like the pharmaceutical and ITC sectors, that are making the big money now. It is a by-product of economic factors on the one hand and the particular structure in Ireland on the other. The Irish structure is pretty unique in terms of how it actually penalises individuals. The UK started off with a similar set of arrangements in the 1970s, which have been very much watered down since, but we have retained the strict close company regime and that is a big factor in explaining why there are relatively few companies paying corporation tax. It is not that tax is not being paid or that Irish companies are not making profits but that the tax on those profits tends to be collected through the income tax as distinct from the corporate tax system.