Help understanding the closed company surcharge

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TTI

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Hi,

I am trying to get my head around the closed company surcharge for my Ltd company. I have gathered the following pieces of information:

Section 32 increases the threshold for application of the close company surcharge from €635 to €2,000 of undistributed investment and rental income. This threshold will also apply in calculating the surcharge on undistributed trading or professional income of certain service companies. This takes effect for accounting periods ending on or after 1 January 2013.
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A close company surcharge of 20% of a company’s distributable rental and investment income is imposed if the company has not made a distribution of the relevant income within 18 months of the end of the accounting period.

If the close company is a professional services company e.g. an engineering company a surcharge of 15% may arise on half the distributable trading income of the company if a distribution is not made within the same time period.
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I have an engineering ltd company and my questions are:
  • Am I correct in understanding that if I leave any unallocated money (i.e. not paid in wages or expenses) in the company above the 2000 euro amount I will pay corporation tax on it and also a 'close company surcharge'?
  • If I spend this money by the end of the next financial year will I avoid this surcharge?
 
There are two seperate Close Company surcharges.

Investment income surcharge applies to estate and investment income of a close company (Section 440 TCA 1997). A surcharge of 20% applies to the after tax Investment or rental income income. Where the excess is less than €2,000 there is no surcharge. There is marginal relief.

Professional Service Company surcharge (Section 441 TCA 1997). A surcharge of 15% applies to the after tax income from professional service companies. Again where the excess is less than €2,000 there is no surcharge. There is marginal relief.

A loss in 2015 will not get rid of a liability to the surcharge in 2014. Only dividends voted for 2014 before 30 June 2016 will.

[broken link removed]
 
Re the Professional Service Company surcharge
Is this done on a per annum basis for each accounting period or is it on retained earnings in the company so at 15%, it would all be gone in tax after c 6 or 7 years.
If its on annual income, is the 2,000 per annum?

In passing, to avoid the surcharge I assume that it is more advantageous for a director to take a salary, which is tax deductible in the company, even if he as other PAYE income that has him at the top rate already, rather than by way of a dividend distribution, which is not tax deductible.
Thanks
 
It's just per year.

Salary beats dividend alright, but in certain circumstances it can make sense to pay the surcharge.
 
HI
What if the company made losses in the years leading up to the year the surcharge arises ? If they have a negative balance sheet in the previous year does this affect the surcharge in the current year?
 
Curious :) said:
HI
What if the company made losses in the years leading up to the year the surcharge arises ? If they have a negative balance sheet in the previous year does this affect the surcharge in the current year?
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Surcharge is a P&L item on annual profits,
before the accounting entry of
Dr Profits for the year
Cr Retained Profits (losses)
 
But I think that if you have a negative balance sheet in the year that the surcharge arises then you do not have to account for a surcharge? Just wondering then if a previous year negative balance sheet affects it too? Also, I think there may be other rules re max of distributable reserves etc? Very hard to find clear information on exemptions etc on the net.
 
there is a document part13-2 on the revenue website which deals with this issue:

maybe some will post a link

Notes for Guidance – Taxes Consolidation Act 1997 – Finance Act 2014 Edition - Part 13


Overview

PART 13 CLOSE COMPANIES

CHAPTER 1

Interpretation and general

This Part is designed to counter the avoidance of income tax at the higher rate by means of the device of allowing the profits of close companies to be accumulated rather than distributed to shareholders in whose hands the distributions would attract income tax at the higher rate. The Part does this by imposing a surcharge at the rate of 20 per cent on the undistributed after-tax investment and estate income of close companies (see Chapter 2). Chapter 1 of the Part is supplemental to Chapter 2 and is concerned with defining, in the first instance, what is meant by a close company (sections 430 and 431). The Chapter also contains a number of sections which provide for matters subsidiary to the meaning of ―close company‖ (sections 432 and 433) and definitions for the purpose of the close company surcharge imposed by section 440 (section 434).

I disagree with your thinking as set out in my post above its a P&L item.
You don't have a balance sheet during the year:

all other things being ignored y/e 2015 as at balance sheet is y/e 2014 as at balance sheet plus after tax earnings from 2015 so the surcharge is on the tax earnings from 2015.
 
In a closed company situation - If your company makes a profit what are the options open to you.

I know you have 18months to distribute profit as a dividend or pay the surcharge.

Can you also invest the profit in shares or similar?
 
Joe_90 said:
There are two seperate Close Company surcharges.

Investment income surcharge applies to estate and investment income of a close company (Section 440 TCA 1997). A surcharge of 20% applies to the after tax Investment or rental income income. Where the excess is less than €2,000 there is no surcharge. There is marginal relief.

Professional Service Company surcharge (Section 441 TCA 1997). A surcharge of 15% applies to the after tax income from professional service companies. Again where the excess is less than €2,000 there is no surcharge. There is marginal relief.

A loss in 2015 will not get rid of a liability to the surcharge in 2014. Only dividends voted for 2014 before 30 June 2016 will.

[broken link removed]
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Joe, From the link, the end of 440 says, in part
The surcharge is to be charged for the earliest accounting period which ends at a time which is 12 months or more after the end of the accounting period in which the surcharge arose.

Sticking with your example above, in terms of dates, what does the above mean.
Undistributed income for Y/e 31/12/2014
18 months ends 30 June 2016, which is accounting year 2016
So is the earliest accounting period... 2017, which means the cash is actually paid before end Sept 2018
Thanks as always
 
Undistributed income for Y/E 31/12/2014 would give rise to a surcharge payable on or before 23 September 2016.
 
Thanks,
My own year end is 8th Nov so I got this from Revenue

ROS reminder to file.
It is now time to file your latest CT1 return via ROS services. This return/payment must be filed on or before 08/08/2016.

which seems to be at variance with

  • Pay, on line, any balance of tax due when lodging the return i.e. within nine months of the end of the accounting period, subject to the 21/23 day rule. (The specified return date and payment due date is the 21st day of the applicable month. This date is extended to the 23rd of the applicable month for companies who file their return and pay any associated tax due via Revenue’s Online Service (ROS)).
Hence my asking.
Thanks to you both.
 
The surcharge does not apply if the company is insolvent and has a negative balance sheet even if there are profits in the year in question.

This is because it is illegal under Irish Company Law for a company to pay a dividend unless it has the available distributable reserves to do so. Therefor as the company cannot make the relevant distribution within 18 months of the accounting year end, the surcharge provisions cannot and does not apply. I believe there is case law to confirm this.

Capnhand
 
The filing date is 9 months after the year end.

When that is after the 21st day of the month the filing date is the 21 or 23 of the 9th month when filing online.
 
If the Professional services 15% surcharge is paid due to the non-distribution of the associated reserves, does the surcharge reduce the taxable undistributed reserves?
Eg
Undistributed reserves for 2014 € 8,000
Allowable excess € 2,000
Balance subject to surcharge € 6,000
15% Surcharge € 900

Are the undistributed reserves € 5,100 or does Revenue still regard them as being 6,000
Thanks as always
 
Do I have to pay the close company surcharge if I'm using my company to trade forex? I'm trading on a daily basis, not investing. I'm not sure if this is a professional service company or not? I have no clients or anything like that, I'm not doing anything commercial or retail, just trading with my money in a limited company.
 
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