Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Question 268: To ask the Minister for Finance if he will exclude the surcharge on undistributed investment income under section 440 of the Taxes Consolidation Act 1997 to construction and manufacturing companies and allow these companies to use the funds from the franked investment income for productive investment in their companies and safeguard employment in the current difficult economic climate; and if he will make a statement on the matter. [1286/10]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Section 440 Taxes Consolidation Act 1997 provides for a surcharge of 20% on any investment and rental income of a close company which is not distributed within 18 months of the end of the accounting period in which that income was earned. Broadly, a close company is a company under the control of five or fewer participators (including associates), or of participators who are directors. Most Irish owned companies are close companies.

The purpose of the close company surcharge is to prevent avoidance of personal income taxation through the accumulation of income within a corporate structure. With company profits subject to the 12.5% rate of corporation tax there would be a strong incentive, in the absence of a surcharge, for persons to earn and accumulate their income within a company and thereby avoid income tax at the higher 41% rate.

Aside from the strong arguments for retaining the surcharge as an anti-avoidance measure, it would be invidious to remove or reduce the surcharge for particular sectors while retaining it for other sectors. Moreover, such an approach would have State-aid implications from an EU perspective, in that it would favour certain companies and sectors here over others. For these reasons, I would not propose to change the existing arrangements along the lines suggested by the Deputy.