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Surcharge on Certain Undistributed Income of Close
Companies
Part 13-02-
This document should be read in conjunction with section 440 of the Taxes Consolidation Act 1997 – the document incorporates Revenue Guidance previously outlined in Tax Briefing 25 February 1997.
Document last updated March 2022
Please consult the page entitled “Tax clearance, filing returns and paying taxes” on the COVID-19 pages on the Revenue website for further information in relation to concessions made for corporation tax.
Details for caseworkers in relation to COVID-19 temporary measures may be found in section 11 of this manual.
Table of Contents
- Background ...................................................................................................................
- 1 Exceptions to surcharge .....................................................................................
- 2 Non-allowable deductions .................................................................................
- 3 How the surcharge is imposed ...........................................................................
- 4 Definition of income [s434(4)] ...........................................................................
- 5 Distributions of a company for an accounting period........................................
- 6 Estate and investment income of a company for an accounting period............
- 7 Computation of surcharge under section 440 ...................................................
- 8 Example of calculation of surcharge under section 440 ....................................
- 9 Interaction of section 23 type reliefs ...............................................................
- 10 Temporary measures in relation to COVID-19 .................................................
Case example : a company whose articles of association, imposed restrictions on the payment of dividends, contended that it was prevented from paying dividends by reason of a restriction imposed by law. However, a shortfall assessment on the company was upheld. The court held that the company was free to alter its articles if it wished to do so – Noble v Laygate Investments Ltd [1978] STC 430.
2 Non-allowable deductions
Renewable energy investments (section 486B) are not deductible against estate and investment income for the purposes of the close company surcharge.
Capital allowances are not deductible against estate and investment income for the purposes of the close company surcharge. For the avoidance of doubt, this does not affect the availability of a deduction for capital allowances which are, by virtue of section 307 TCA 1997, treated as a trading expense of the trade when computing income for the purposes of section 434 TCA 1997.
3 How the surcharge is imposed
To understand how the surcharge is to be imposed under section 440, it is necessary to define the different elements which make up the calculation of the surcharge. It is particularly essential to define the meaning of “income” and “distributable income” before understanding the meaning of “distributable estate and investment income”.
4 Definition of income [s434(4)]
The income of a company for an accounting period shall be the income for the accounting period, computed in accordance with the Corporation Tax Acts, exclusive of franked investment income, before deducting:
any loss incurred in any trade, or profession carried on by the company, which is carried forward from an earlier, or carried back from a later, accounting period, any loss which if it were a profit would be chargeable to corporation tax on the company under Case III or IV of Schedule D and which is carried forward from an earlier accounting period or any expenses of management or any charges on income which are so carried forward, and any excess of deficiencies over surpluses which if such excess were an excess of surpluses over deficiencies would be chargeable to corporation tax on the company under Case V of Schedule D and which is carried forward from an earlier, or carried back from a later, accounting period,
and after deducting:
any loss incurred in the accounting period in any trade or profession carried on by the company,
any loss incurred in the accounting period which if it were a profit would be chargeable to corporation tax on the company under Case III or IV of Schedule D, any excess of deficiencies over surpluses which if such excess were an excess of surpluses over deficiencies would be chargeable to corporation tax on the company for the accounting period under Case V of Schedule D, any amount allowable as a deduction against relevant trading income by virtue of section 243A.
Section 434(1) provides for both the definition of terms used in section 440 and for the calculation of the various amounts which make up the surcharge – relevant definitions under this section are as follows:
“estate income” means income, in the nature of rent from land or buildings which is chargeable to tax under Case III, IV or V of Schedule D.
For the purposes of calculating surcharges “franked investment income” excludes distributions made out of exempt income (e.g. distributions out of exempt patent royalty income or profits or gains from occupation of certain woodlands).
The term “investment income” of a company is income other than estate income which would not, in the hands of an individual, be earned income within the meaning of section 3 but does not include such income received in the course of trading. However, without affecting the meaning of “franked investment income”, a dividend or other distribution by a company will not be regarded as “investment income” for the purposes of the close company surcharge if the close company to which it is paid would be exempt from tax on any gains on the disposal of those shares under section 626B at the time the dividend or distribution is being made.
“Relevant charges” are charges allowed under section 243 other than charges of an excepted trade (i.e. charges allowed against non-trading income). These are deductible in calculating estate and investment income of a company for surcharge purposes.
The term “trading company” means any company which exists wholly or mainly for the purpose of carrying on a trade, and any other company whose income does not consist wholly or mainly of investment or estate income.
6 Estate and investment income of a company for an
accounting period
Section 434[(5)(a)] provides that the estate and investment income of a company for an accounting period shall be the amount by which the sum of:
the amount of franked investment income for the accounting period, and an amount determined by applying to the amount of the income of the company for the accounting period the fraction A/B
where:
A. is the aggregate of the amounts of estate income and investment income taken into account in computing the income of the company for the accounting period, and B. is the amount of the company's income before taking account of any amount specified in paragraphs (d) to (g) of subsection (4),
exceeds the aggregate of:
the amount of relevant charges, and the amount which is an allowable deduction in computing the total profits for the accounting period in respect of expenses of management by virtue of section 83(2).
Section 434[(5)(b)] provides that the trading income of a company for an accounting period shall be the income of the company for the accounting period after deducting:
an amount equal to the amount specified in subparagraph (ii) of paragraph (a), where the aggregate of the amounts specified in clauses (I) and (II) of paragraph (a) exceeds the sum of the amounts specified in subparagraphs (i) and (ii) of that paragraph, the amount of the excess, and charges on income paid for the purposes of an excepted trade within the meaning of section 21A [s434(5)(a)]
7 Computation of surcharge under section 440
For the purpose of section 440:
(a) “distributable estate and investment income” of a company for an accounting period means the estate and investment income of the company for the accounting period after deducting the amount of corporation tax which would be payable by the company for the accounting period if the tax were computed on the basis of that income;
Note: In the case of a trading company, the distributable estate and investment income for an accounting period shall be the amount determined in accordance with paragraph (a) reduced by 7.5 per cent [s434(5A)(b)].
The amount of income for part of an accounting period shall be a proportionate part of the amount for the whole period [434(6)].
(b) For the purpose of section 440, the distributions of a company for an accounting period shall be taken to be the aggregate of:
any dividends which are declared for or in respect of the accounting period and are paid or payable during the accounting period or within 18 months after the end of the accounting period, and all distributions, other than dividends, made in the accounting period.
The surcharge is calculated by taking 20% of the difference as between (a) and (b).
Step 4: Calculate “surchargeable” amount
Distributable estate and investment income 10, Less: Distributions for the period (2,000) Surchargeable amount 8,
Step 5
Surcharge 8,651 x 20% 1,
This surcharge is treated as part of the corporation tax liability for the subsequent accounting year ending 21 December 2014 and is payable if no further dividends are paid by the company before 30 June 2015 (i.e. within 18 months following the relevant accounting period).
9 Interaction of section 23 type reliefs
The following guidance was originally included in Tax Briefing 25 of 1997 and continues to be Revenue practice:
Interaction of sections 23 FA 1981/43 FA 1994 and surcharges under section 101 Corporation Tax Act 1976:
“Revenue are now prepared to accept that in computing income of an accounting period for the purpose of section 100(4) CTA 1976 any allowable expenditure under section 23(2) FA 1981 and section 43(2) FA 1994 which is carried forward from an earlier accounting period may be deducted. In other words, it is accepted that any relief under section 23 FA 1981 or section 43 FA 1994 which has not already been used to reduce a charge to tax on the company in question may be used to calculate the estate income and the distributable income of the company for the accounting period.”
10 Temporary measures in relation to COVID-
10.1 Temporary concession (see important update below)
In cases where a distribution is not made within 18 months from the end of the accounting period in which the income arose and in response to COVID- circumstances affecting the company, Revenue will, on application, extend the 18- month period for distributions by a further 9 months.
10.2 Important update (end of concession)
The COVID-19 related temporary concession referred to above will only apply to accounting periods ending up to 31 March 2022.
Normal close company surcharge rules will apply to accounting periods ending after this date, i.e. close company surcharges will apply to income of close companies that is not distributed within 18 months from the end of the accounting period in which the income arose.
Full details may be found on the Revenue website: COVID-19 and Close company surcharges.
The following material is either exempt from or not required to be published under the Freedom of Information Act 2014.
[…]
If a distribution which can be made (taking account of any restriction imposed by law as regards the making of distributions as required by section 434(7) TCA 1997) is not made by the end of the extended period, the resulting surcharge will be included in the corporation tax liability for the 12-month accounting period following the surcharged accounting period as normal and interest will apply to the late payment of the surcharge.
The following material is either exempt from or not required to be published under the Freedom of Information Act 2014.
[…]
If a case were reviewed following the expiration of the extended 9-month period and it was found that there was no basis for the company not paying a dividend within the normal 18-month timeframe, the surcharge and normal due dates would apply, i.e. the due dates for the corporation tax liability for the 12-month accounting period following the surcharged accounting period, and interest would apply to the late payment of the surcharge.
