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This article was first published in the February/March 2019 Ireland edition of Accounting and Business magazine.

The majority of Irish companies are close companies: an Irish resident company that is controlled by five or fewer participators. The provisions concerning close companies were introduced to counter the tax advantage that could be obtained by the retention of profits in closely held companies. Such profits attracted tax at a lower rate than the personal tax rate, to which those profits would be subject if distributed as dividends to shareholders.

Finance Act 2017 introduced changes, which may result in the sale of shares or share-for-share exchanges, involving a close company being subject to income tax and not capital gains tax (CGT). Section 135 (2A) and (3A) of the Taxes Consolidation Act (TCA) 1997 outlines additional interpretations of the term ‘distribution’ and contains anti-avoidance measures to counter collusive arrangements made between companies. Effective since 2 November 2017, these anti-avoidance provisions have added to the complexities of advising clients in this area.

In our firm we are regularly seeing the impact these new anti avoidance provisions are having, particularly regarding management buy-outs, earn-outs and deferred consideration arrangements for those clients retiring from close companies. 


Income tax treatment may apply where a shareholder enters into arrangements whereby the consideration for the acquisition of the shares is funded, or is to be funded, directly or indirectly out of the assets of the company. The term ‘arrangements’ means any agreement, understanding, scheme, transaction or series of transactions involving both parties to the transactions.

Example: Two brothers run ABC Ltd and own 100% of the shares equally. The company has built up cash reserves over the years and has retained profits of €1.5m. One brother wishes to exit the business and have ABC Ltd buy out his shares. However, rather than have ABC Ltd purchase his shares directly, which would trigger a charge to income tax, the remaining brother arranges to set up a new company (NewCo) to buy them.

NewCo purchases the shares for €750,000. The consideration in respect of the acquisition is left outstanding. ABC Ltd subsequently pays a dividend of €750,000 to NewCo, which NewCo uses to pay the deferred consideration. The payment is treated as a distribution made by ABC Ltd.

Management buy-out (MBO)

An MBO involves the management team of a company buying the company from the shareholders. Many readers will have experience of this, typically involving the formation of a new company to acquire the shares of the target company. Many MBOs involve the provision of financial assistance by the target company, whereby the cash contained in the target is utilised to pay for the acquisition.

Example: Ms Teehan holds 100% of the ordinary share capital of Target Co, which is valued at €1.5m, including cash of €1m. Both Ms Teehan and MBO Co agree to consideration on the sale of €1.5m, on the basis that €1m will be paid from the reserves of Target Co. The balance of the agreed consideration will be funded by borrowing.  

MBO Co acquires the shares of Target Co and Target Co subsequently makes a distribution of €1m to MBO Co, which is exempt from tax under franked investment income. These funds are then utilised by MBO Co to pay Ms Teehan for her shares in Target Co. The new provisions apply to treat the payment of €1m to Ms Teehan as a distribution made by Target Co. Therefore, Target Co would be liable to dividend withholding tax (DWT) and Ms Teehan would be liable to income tax at her marginal rate.


An earn-out is a transaction whereby both parties agree to defer payment or part thereof, with the final consideration payable calculated by reference to the future performance of the business.

Example: JW Ltd is owned by Mr Watson. He agrees to dispose of his shares to Bloggs Ltd. The consideration agreed was €1m payable immediately, and a payment of €500,000 if agreed financial performance of JW Ltd for a three-year period after the disposal.

Mr Watson and Mr Bloggs agree that the cash reserves in JW Ltd will be utilised to pay the initial consideration of €1m. This payment to Mr Watson would be treated as a distribution by JW Ltd.

JW Ltd meets the targets agreed under the earn-out agreement. JW Ltd loans or pays a dividend to Bloggs Ltd, which is used to pay the deferred consideration to Mr Watson. Although Mr Watson is privy to the terms of the earn-out, he has not engaged in any arrangements to secure payment from the assets of JW Ltd. Therefore, this payment
would be subject to CGT and not income tax.

Revenue guidance

Revenue has clarified that these provisions ‘only apply where the disposing shareholder

  • enters into arrangements to sell their shares and secures that the consideration is funded out of the assets of the company; or
  • is party as to how the payment is to be made and the payment is made directly or indirectly from the assets of the acquired company’.

Revenue has further clarified that the provisions do not apply where bona fide financing arrangements are entered into by a purchaser in relation to the acquisition of shares.

As most companies in Ireland fall within the definition of a close company, it is critical that all agents are aware of the implications of these anti-avoidance measures, particularly given the importance of management buy-outs, earn-outs and deferred consideration arrangements for those clients retiring.

Advisers to the sale of a close company should be cognisant to avoid a distribution arising on the sale, which is liable to income tax at the marginal rate and seek to achieve CGT treatment, which attracts a lower rate of tax and opens the opportunity to CGT reliefs.

John Wilson is an assistant tax manager at Doyle Keaney Tax Advisors.