Buyback by a company of its own shares and Retirement relief

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The Companies Act, 1990 provides a mechanism for companies to use the company’s funds to redeem or buyback the shares held by a shareholder in the Company. The Act sets out the conditions that must be met before a company is in a position to redeem or buyback the shares.

In general, any repayment over and above the amount which the company received for a subscription of shares is treated as a distribution and subject to income tax at marginal rates. If certain conditions are met, however, the shareholder may avail of capital gains tax treatment on the buyback.

This can be beneficial where the shareholder would be otherwise unwilling to exit the company due to the prospect of a significant income tax charge on a share buyback.

The main conditions for relief are that:

• the company must be a trading company or the holding company of a trading company;
• the shareholder participating in the share buyback must be both resident and ordinarily resident in the State in the tax year in which the share buyback takes place;
• the shareholder must own the shares for a period of at least five years ending on the date on which the disposal;
• the share buyback must be for the benefit of the company's trade;
• the participating shareholder's remaining shareholding in the company after the buyback (expressed as a percentage of the company's issued nominal share capital) must not exceed 75% of what it was pre the buyback; and
• the shareholder must no longer be connected with the company (broadly after the transaction the shareholder and his associates must own less than 30% of the company).

Retirement relief

A gain arising to an individual who has attained the age of 55 on the disposal of his business or shares in his/her company of holding is disregarded where the consideration is less than €750,000 in respect of disposals made on or after 1 January 2007 and before 1 January 2014. Where the consideration is more than the limit marginal relief applies.

In general, to qualify for the relief, the individual must have owned the assets for a minimum of 10 years and must have been a working director for not less than 10 years and a full-time working director for not less than 5 years.

The Finance Act 2012 reduced the consideration limit of €750,000 to €500,000 for individuals aged 66 and over in respect of disposals made on or after 1 January 2014.

Contact Dylan Byrne Director in OSK on 01 439 4200 for all your tax and accounting services.

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