Legislation

I begin by restating the relevant definitions contained in legislation.

Section 597AA(3) TCA states:

“Subject to subsection (4), the rate of capital gains tax chargeable on a chargeable gain or chargeable gains accruing in respect of a disposal or disposals of the whole or part of chargeable business assets made by a relevant individual shall be 10 per cent”.

Section 597AA(2) TCA states:

“'Chargeable business asset' means an asset, including goodwill which…-

(ii) is a holding of ordinary shares in -

(I) a company whose business consists wholly or mainly of carrying on a qualifying business,

or              

(II)  a holding company of a qualifying group.”

"Chargeable business asset' does not include -

(i) shares (other than shares mentioned in paragraph (a)(ii)), securities or other assets held as investments…

(v) subject to subsection (8), shares or securities in a company which are disposed of directly or indirectly to another company, where, immediately following the disposal, the individual relates to the first-mentioned company.”

Section 597AA(1) TCA contains the following definitions:

“51 per cent subsidiary” has the same meaning as it has in section 9(1)(a)”

“group” means a holding company and all companies which are 51 per cent subsidiaries of the holding company.”

‍“holding company” means a company whose business consists wholly or mainly of the holding of shares of all companies which are its 51 per cent subsidiaries.”

““qualifying business” means a business other than -

(a) the holding of securities or other assets as investments,

(b) the holding of development land, or

(c) the development or letting of land;”

“qualifying group” means a group, the business of each 51 per cent subsidiary (other than a holding company) in which consists wholly or mainly of the carrying on of a qualifying business.”

Revenue Interpretation

Revised Entrepreneur Relief TDM Part 19-06-02b states:

“a holding company means a company whose business consists wholly or mainly of the holding of shares of all companies which are its 51% subsidiaries. A qualifying group means a group where the business of each 51% subsidiary (other than a holding company) consists wholly or mainly of carrying on a qualifying business”.

The above extract from the TDM is not, in my view, an interpretation of the definitions of “holding company” and “qualifying group”. It is almost word for word a repetition of the words found in the legislation itself.

It is my understanding and experience that Revenue have sought in certain circumstances to interpret these definitions to deny ER in instances where a taxpayer is disposing of shares in a holding company of a qualifying group that has a less than a 51% shareholding in a single trading subsidiary.

The Irish Tax Institute’s Pre-Finance Bill Submission from May 2023, in recommending changes to the Entrepreneur Relief legislation, elucidates Revenue’s view on this issue under the heading of “Where a group is party to a joint venture”.

“One of the conditions of Entrepreneur Relief is that all subsidiaries must be minimum 51% subsidiaries for the relief to apply. If a group is party to a joint venture and holds less than 51% of the joint venture company, this again can result in full denial of the relief.

We recommend that the legislation is amended to remove restrictions to Entrepreneur Relief in situations where a group has a shareholding in a joint venture company of less than 51%.”

In my view there is no need to amend the Entrepreneur Relief legislation. This restrictive interpretation is incorrect in law as it does not take account of the actual words used in the legislation. In particular, the concept of “wholly or mainly” must be completely ignored for Revenue’s interpretation to prevail.

Interpretation of Legislation

In order to establish whether a “group” for the purposes of ER exists, a taxpayer is only required to consider in the first instance companies that are 51 per cent subsidiaries i.e., “the business of each 51 per cent subsidiary”. It does not state that all companies must be 51 per cent subsidiaries for a group to exist. Put simply, there is no requirement in legislation for all companies to be 51 per cent subsidiaries for a group to be formed and subsidiaries that are less than 51 per cent are simply ignored.

In addition, no reference is made in the definition of “holding company” to situations where a holding company holds less than 51 per cent of another company or companies. The term “holding company” is defined as a “company whose business consists wholly or mainly of the holding of shares in all companies which are its 51 per cent subsidiaries”. This is not same as saying its business must consist of holding shares in companies ‘all of which’ are its 51 per cent subsidiaries. What is required is that the business of a holding company must “wholly or mainly” consist of holding shares in 51 per cent subsidiaries.

In my opinion, where a company has multiple subsidiaries or multiple shareholdings in companies that are less than 51 per cent subsidiaries, a taxpayer is required to ascertain whether the holding company is “wholly or mainly” holding shares in 51 per cent subsidiaries only. For example (if we assumed for simplicity that turnover is the key metric to determine whether a company is wholly or mainly trading), if a holding company has one 100 per cent subsidiary with trading turning of say €100m a year and holds 10 per cent investments in ten other companies that turnover €1m per year, then the holding company should be regarded as “wholly or mainly” holding shares in 51 per cent subsidiaries.

Similarly, the definition of a “qualifying group” also requires that the business of each 51 per cent subsidiary must “wholly or mainly” consist of the carrying on of a qualifying business. Provided all the 51 per cent subsidiaries are carrying on a qualifying business, the “group”, should be regarded as being a “qualifying group”.

Dormant Companies

In my view, there seems to be some confusion with the interpretation of the dormant company restriction. It is clear that if a group has a 51 per cent subsidiary that is dormant, there is no qualifying group for ER purposes as “each 51 per cent subsidiary” is not “wholly or mainly…carrying on a qualifying business”. But oddly, if a group holds less than 51 per cent in a dormant company, this same restriction does not apply as you ignore companies that are not 51 per cent subsidiaries when applying the wholly or mainly test.

Conclusion

For there to be such a lack of clarity for taxpayers and advisors alike in interpreting such a key relief is remarkable. Revenue’s TDM does not, in my view, explain clearly their interpretation of these important definitions in any detail.

In my view, the legislation is clear. However, I can appreciate how it can be difficult to interpret in certain circumstances. Clarity via an updated TDM or amendments to the legislation itself, would be welcome for taxpayers and advisors alike. 

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