Stage 3 Module 10 Withholding Taxes Chartered Tax Consultant Fiona Dunlevy – Chartered Accountants House
Withholding Taxes Learning Objectives Withholding Taxes on Distributions Interest Royalties Rent Risks and Requirements Managing withholding taxes Reliefs and Exemptions – minimise cash flow and compliance costs
Overview Withholding taxes = Collection Mechanism Tax not collected from beneficiary Tax collected from other person 3 Categories Payments to non residents Fiduciary Withholding Taxes Enforcement Withholding Taxes
(1) Payments to Non Residents Avoids non payment of tax in cross border situations Financial and HR investment for cross border collection mechanisms avoided Withholding taxes more efficient
(2) Fiduciary Withholding Taxes PAYE, VAT and DIRT Collection and payment obligations devolved to businesses Administration and collection burden falls on business community Likely to reduce tax fraud
(3) Enforcement Withholding Taxes Withholding tax on payments to certain businesses PSWT Professional Services Withholding Tax State and State owned companies RCT Relevant Contracts Tax Construction, Forestry and Meat Processing Principal Contractor
Withholding Taxes Levied on Gross Income Rents – not on net Case V Gross/net distinction Major tax risk if not operated Exemptions available Matter of procedures No tax cost and no risk to accountable person if operated correctly
Dividend Withholding Tax Common internationally OECD Model Treaty – source country 5%/15% on dividends High dividend withholding tax for non residents Extensive DWT exemptions for non residents Exception to international norm Introduced in 1989 Exemptions for non residents to encourage inward investment
Company Distributions DWT applies to distributions – actual and deemed Distributions S.130 TCA 1997 - includes much more than dividends Returns from resident companies – taxable as income in hands of shareholders Liable to DWT unless exemption applies Date of payment determines: date of DWT payment and filing timing of tax liability for recipient
Shares Ordinary Shares Preference Shares Rights Issue Bonus Issue Scrip Dividends
Example 1 Kwick Plc, an Irish registered and tax resident company, announces a rights issue where every shareholder is given an opportunity to subscribe for one new share for every five held, at a price of €15. Where the rights are not exercised, the right may be sold by the shareholder and the proceeds liable to CGT.
Example 2 Kwick Plc, had a very profitable year and wishes to issue bonus shares to its shareholders. Each shareholder will be allotted one bonus share for every four shares held. The receipt of bonus shares is not liable to income tax or CGT.
Example 3 John Murphy holds 5,000 shares in Goldhills plc which is an Irish tax resident quoted company. He has the option of being paid a dividend of 15 cent per share or a scrip dividend of one new share for each 50 shares held. John elects to receive the scrip dividend and is allotted 100 new shares. His income is taxable under Schedule D Case IV is €750.
What is a distribution? Section 130 TCA 1997 Section 135 TCA 1997 (Distributions: supplemental)
Distributions – S.130(2)(a) TCA 97 S.130(2)(a) TCA 1997 - Dividends S.4(5) TCA 1997 – dividends shall be treated as paid on the date when they become due and payable Murphy v The Borden Co Ltd Interim dividend paid when credited to intercompany account Final dividend: Due and payable when declared Interim dividend: Actual payment DWT : Due and payable date for rate, payment and declarations
Example The directors of Sunday Limited declared an interim dividend on 5 December 2010 but it was not actually paid until 3rd March 2011. For tax purposes the dividend is not regarded as paid until 3rd March 2011 with the follow-on payment and filing dates for DWT.
Distributions – S.130(2)(b) TCA 97 S.130(2)(b) TCA 1997 – Other distributions out of assets of the company in respect of shares Return of capital > par value and premium paid Buyback of shares Repayment of redemptions of share capital Reduction of capital Exclusions S.175 and 176 TCA 1997: share buybacks liable to CGT Distribution = redemption less subscription
Example Apple Limited has 10,000 ordinary shares and 2,000 A ordinary shares in issue, originally subscribed at a premium of €6 per share in 1990. It redeems the 2,000 A ordinary shares on 1 Jan 2011 at €10 per share. The difference between the redemption amount of €10 and the original subscription price of €6 per share is a distribution.
Distributions – S.130(2)(c) TCA 97 S.130(2)(c) TCA 1997 – Redemption of bonus shares or debentures Issued out of revenue reserves = distribution Share or debentures issued out of new consideration excluded “new consideration” defined in S.135 TCA 1997
Example Bell Limited has 10,000 ordinary shares in issue and has substantial revenue reserves. On 1st January 2010 it issues a bonus debenture of €1,000 carrying interest at 5% and repayable on 1st January 2015. When the debentures are redeemed on 1st Jan 2015, Bell Ltd is treated as making a distribution of €1,000 per share and the shareholders are taxable on this distribution.
Distributions – S.130(2)(d)TCA 97 S.130(2) (d) TCA 1997 – Interest reclassified Anti avoidance provision Interest treated as a distribution No tax deduction for interest payment Exclusions for certain interest Very important to understand when this section applies and when the exclusions are met
Exclusions from deemed distributions S.452 TCA 1997 Trading company may make election Interest will not be treated as distribution if Paid to 75% non resident parent – S.130(2)(d)(iv) Paid to recipient in treaty country or is annual interest Paid in ordinary course of company’s trade Otherwise allowable as a Case I deduction S.845 TCA – exemption for banks S.130(2)(d)(iv) interest – elect with CT Return Bona fide banking business and interest otherwise deductible Not> reasonable commercial rate of return
Exemptions S.130(2B) TCA 1997 S.130(2)(d)(iv) interest Interest paid to foreign parent in EU country Article 49 TREU – freedom of establishment Applies to interest deductible as a charge on income
Distributions – S.130(2)(e) TCA 97 S.131 TCA 1997 – Bonus Issues Bonus issue following repayment of share capital Repayment of share capital following bonus issue Later event treated as a distribution Capped at value of capital repayment made Anti avoidance provision Prevents receipt of retained profits being taxed as capital Exception for non close company – bonus issue of non redeemable shares >10 years after capital repayment
Distributions – S.130(2)(f) TCA 97 S.130(2)(f) TCA 1997 – ESOT Beneficiaries Payments made out of dividends received by ESOT Deductions allowed for interest and trust expenses Distributions by ESOT to members treated as dividends Dividends taxable in hands of ESOT members
Distributions – S.130(3) TCA 97 S.130(3) TCA 1997 –T/f of assets to s/holders Treated as distribution if value of assets > contribution by shareholder Amount of undervalue = distribution Liabilities assumed by shareholder are distributions Sec 130(3) & (4) TCA 1997 exclusion Transfers between resident companies where on is a subsidiary of the other Applies also where both subsidiaries have parent in EU or DTA country Sec 130(5) TCA exclusion – non cash transfers between tax resident companies
Close Company S.130(1) TCA 1997 – deemed distributions S.436 – expenses for participators and associates S.437 – excess interest paid to directors and associates Living accommodation; entertainment expenses Other benefits and facilities No deduction for CT Taxable as distribution
Close Company Exclusions for deemed distributions: BIK under S.118 TCA 1997 Pension or similar benefit for spouse, children or dependents on death or retirement Close company and participator are companies Both resident in Ireland 51% subsidiaries Transfers of assets and liabilities only S.236 – art object on public display Anti avoidance – S.436(6) TCA 1997
Close Company Where a company transfers assets or liabilities to its members, or under the close company provisions (i.e. expenses for participators), the amount by which the market value of the amount or benefit of the transfer exceeds the amount or value of any new consideration given is treated as a distribution or the expense paid on behalf of the participator is a deemed distribution. Consequences: Income tax under Schedule F – S20(1) TCA 97 Non deductible for corporation tax purposes - S.76(5) TCA 97 DWT (may need to re-gross under S172B(3) TCA 97
Franked Investment Income FII = distributable estate and investment Close companies – 20% surcharge Not distributed within 18 months of AP Sec 434(3A) TCA election No reduction in distributable income of payor Payor may have surcharge Avoids multiple surcharges
Capital Distributions Includes distribution on winding up Not a distribution for S.130 TCA 1997 Interim or final payment by liquidator to shareholders Liable to CGT in hands of shareholders Company buyback under S.175 & 176 TCA 1997 Capital distribution – liable to CGT
Dividend Withholding Tax DWT applies to resident companies making distributions to shareholders 1999 – move from imputation to classical system Introduction of 12.5% CT rate Company pays CT on profits Shareholder pays income tax on dividend “Double tax” on shareholder DWT @ standard rate All or part of tax due is collected through DWT
DWT Ss. 172A-172M TCA 1997 DWT Rate = standard rate of tax “Relevant distribution” S.130 TCA distributions S.436 and 437 expense and interest payments S.816 scrip dividends of quoted and unquoted companies – reduce value by 20% for DIRT Excluded relevant distributions to An Irish resident company where payor is 51% sub Government Ministers (in that capacity) National Pension Reserve – as specified NAMA and companies owned by NAMA plus 75% subs
DWT Stapled-stock arrangements Shareholders in two different countries Facility to source dividend from country of residence DWT not operated where dividend is sourced from non resident country S.172L TCA 1997 Revenue filing – details of Irish recipient and paying company within 14 days
DWT Statements S.172I TCA 1997 Statement to be issued showing Company name and address Recipient name and address Date of distribution Amount of distribution and DWT Dividend warrant can contain details plus Amount of dividend or interest Period for which dividend made Disclose amounts from capital
DWT Exemptions Irish Resident shareholders S.172C TCA 1997 excluded person Irish resident companies ESOTs Pension Schemes CIUs Charities Sporting bodies Incapacitated individuals and trusts – if exempt from IT Managers of ARFs, AMRFs and SSIAs Composite Resident Form V3 Retain for 6 years
DWT Exemptions Foreign shareholders “Qualifying non resident persons” Companies in EU or DTA country –not under control of Irish resident persons Non resident companies ultimately controlled by persons resident in EU or DTA country Non resident companies traded on stock exchange of EU/DTA country/approved by Minister Other non resident persons – not Irish resident or ordinarily resident, resident in EU/DTA country
Non Resident Companies Non-Resident Form V2B Made by non resident company Valid in year made plus 5 years S.172D(3)(b)(ii) TCA 97 – show territory or residence S.172D(3)(b)(iii) TCA 97 –Stock Exchange address
Parent Subsidiary Directive No 90/435/EEC No withholding tax S.831 and 831A TCA 1997 Excludes dividends on winding up – not liable to DWT Divs to 5% EU parent – Directive applies Swiss parent – 25% shareholding required Majority of voting rights cannot be controlled by residents of non relevant territory unless BF test met
Non Resident Exemptions Others Form Non-Resident V2A – foreign individuals Form Non-Resident V2C- others Signed by non resident person and foreign tax authority of residence (unlike companies) Discretionary Trusts – certified by Revenue Valid until 31st December five years following issue
Filing of DWT Declarations 14th of month following month in which distribution paid Interest on late payment – S.172K(6) TCA 97 Details to be filed where no DWT payable Electronic filing
DWT Refunds Excluded persons and qualifying non residents Appropriate declaration not in place at time of payment DWT Section in Revenue Include Composite Resident Form V3 or Non-Resident Form V2A, V2B or V2C Declarations from foreign Revenue authority Claims by shareholders in DTA country where no refund under domestic law
Recap What is a distribution? What are the consequences? How is tax levied? What are the DWT implications? What are the documentation requirements?