Seán Fleming (Laois, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

153. To ask the Minister for Finance if the legislation on close company professional service surcharge (details supplied), section 441 of the Taxes Consolidation Act 1997, distorts competition; if the lack of clarity about what is and is not a professional services company may become damaging to Ireland's reputation for clear taxation policies and rules; and if he will make a statement on the matter. [17288/16]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The 12.5% rate of corporation tax applies to the relevant trading profits of all companies regardless of their size and regardless of whether they are close companies or not. 

Broadly, a close company is a company that is under the control of five or fewer participators or any number of participators who are directors.  A close company could be subject to a close company surcharge of 20% in respect of its undistributed estate and investment income.  This would only apply to the extent that it does not distribute that income to its shareholders within 18 months of the end of the accounting period to which it relates.  

A close company that is a service company, being a company engaged in professional services, could also be liable to a close company surcharge of 15% in respect of half of its undistributed trading income.  Again, this would only apply to the extent that this income is not distributed to its shareholders within 18 months of the end of the accounting period to which it relates, and therefore, a surcharge can be avoided entirely by a service company if it distributes income to its shareholders.  To allow a close service company to reinvest in its business, the legislation allows such a company to retain up to half of its trading income without triggering a close company surcharge on that income.

The intention behind the surcharge in section 441 of the Taxes Consolidation Act 1997 is not to distort competition but rather to discourage professional persons from channelling their activities through a controlled company so that income can accumulate without being distributed and, thereby, allowing those professional persons to avoid income tax at higher rates on such income.  In the absence of the surcharge, professional persons operating through a corporate structure may enjoy a tax advantage over self-employed professionals.

For those companies for which control is spread over a larger number of participators, and which do not fall within the definition of a close company, the close company surcharges do not apply.  This is because close company legislation operates by reference to objective criteria that are targeted towards circumstances where the income tax base is most likely to be at risk.  It is not perceived that the same level of risk exists, that activities have been channelled through a corporate structure to avoid income tax, where a company is not closely held.  This is the case for companies of all sizes, whether SMEs or larger firms, which are not closely held.

The service company surcharge applies to closely held companies that are engaged in professional services.  Tax legislation does not define "profession" and the term must therefore be given its ordinary meaning, taking into account general principles of statutory construction and relevant case law.  Revenue issued a Tax Briefing in June 2002 (Issue 48) which provides guidance on the activities which would fall within the definition of profession and lists a number of professions that are regarded as falling within the ambit of section 441 TCA 1997. The Tax Briefing also lists a number of activities which are not considered to be a profession.