How are undistributed profits in a company taxed?

[Brendan Burgess]

I want to check the calculations I used in , so I need to confirm my understanding of how corporation profits are taxed.

Let's say I am an IT contractor with €100k of trading profits this year which I leave in the company. Is the following correct:

Corporation Tax at 12.5% - €12,500
Leaving €87,500

This is subject to a Professional Service Company Surcharge of 7.5% - €6562.5
Leaving the company with €80937.5

So the effective tax rate is 19%.


Rental and Investment Profits
If I accumulate money in the company, let's say it earns €100,000 in rental and dividend income.

Corporation Tax @ 25%
Leaving €75,000
Investment Income Surcharge 20% €15,000
Leaving the company with €60,000

Effective tax rate within the company: 40%

 

[Tommy]

Is the Surcharge on Undistributed Income the same thing as the Close Company Surcharge?

Yes

It does not apply to trading income, undistributed or otherwise. An IT contractor company will not face any such surcharge unless it has investment income.

 

[Capall]

CLOSE COMPANY SURCHARGE

The surcharge for undistributed investment income is 20%. Service companies are subject to an additional surcharge of 15% of 50% of undistributed trading income.
A service company being a company whose income is derived from carrying on a profession or providing professional services.
In TB 48 the revenue give a list of occupations that they treat as professions for the application of the service company surcharges, Included are Management consultant and computer programmer which I would take to encompass IT Contractors of any kind.

 

[Brendan Burgess]

Re: CLOSE COMPANY SURCHARGE

From [broken link removed] in PDF format.

Professional Service Company Surcharge
Section 441 TCA 1997 provides for a surcharge on certain undistributed income of service companies. The
section defines a service company as including close companies where the principal part of the company’s income is derived from:
The carrying on directly of a profession
The provision of professional services
Or a company
Which has or exercises an office or employment.
Also included are:
The provision of services or facilities to such companies, or
The provision of services or facilities to an individual or partnership carrying on a profession.

However, not included in the latter are genuine cases where the services or facilities are provided for persons not connected with the company.

As the tax acts do not define “profession” it must be given its ordinary meaning in accordance with the general principles of statutory construction. In the tax case of CIR V Maxse, 12 TC 41, it is stated that profession involves an occupation requiring either intellectual skill, as in painting, sculpture or surgery or skill controlled by the intellectual ability of the operator. It distinguishes this from an operation, which is substantially the production or sale of commodities. While certain activities clearly fall within this efinition and are accepted as being the exercise of a profession, such as medicine or law, there may be questions about the status of others. Each case should be examined with regard to its own particular facts and the question of degree is important.

However the following are regarded as being professions and as falling within the provisions of Section 441:

Accountant
Actor
Actuary
Archaeologist
Architect
Auctioneer/Estate Agent
Barrister
Computer programmer
Dentist
Doctor
Engineer
Journalist
Management Consultant
Optician
Private School
Quantity Surveyor
Solicitor
Veterinary surgeon.

While the above are considered to be providing professional services, the list is not intended to be an exhaustive list of all possible professions.

The following activities are generally not considered to constitute the carrying on, of a profession:

Advertising Agents
Auctioneers of livestock in a cattle mart
Insurance brokers
The operation of a retail pharmacy
Public relations companies
Stockbrokers.

Accountancy
It is also considered that whereas accountancy comes within the meaning of profession, bookkeeping,
payroll and VAT compliance activities would not in themselves constitute a professional activity. Any business involving tax planning, be it investing or structuring, would come within the general heading of accountancy. It is considered that this encompasses financial services.

 

[Brendan Burgess]

Re: CLOSE COMPANY SURCHARGE

So if I have a professional services company with €100k in profits, the effective tax rate is 19%, leaving me with €81,000. If I liquidate the company, I will pay a further 20% CGT on €81,000 which is €16,000.

So the effective tax rate is 35% compared to 47% income tax and PRSI if I pay it as salary.

If I have a trading company, the effective tax rate is 30%.

So is it correct to leave the money accumulate in the company and then liquidate it?

Paying it into a pension scheme is more tax efficient again, but that's another story.

Brendan

 

[Capall]

IT COntractor

Most contractors earning 100k would not be in a position to leave much money in the company. The problem for most one man companies is getting the money you need to live on out of the company in a tax efficient manner.

It is not really an option to be liquidating companies and setting up new companies if you are an ongoing contractor. Also I think the revenue could attack such a scheme under s817 which is designed to counteract schemes which convert what would otherwise be schedule f income into a capital receipt.
If you were getting out of the business altogether and had been able to build up funds in the company then yes you should be able to liquidate the company and get the money at 20%. In this scenario you could also probably pay yourself a tax efficient termination payment.

Except for making the most of expenses to reduce the companys income there isn't any other option really except to pay the money out as salary.
There is a raft of close company legislation aimed at counteracting previous established methods of getting money out to directors in a tax efficient manner.

Since the changes in the pension legislation it would look very attractive now if you are a long term contractor etc with a ltd company to set up a self administered pension scheme which the company can contribute to and build up property or equity portfolios. Obviously you would need to be in it for the long haul to do this.


The situation for trading companies is different because you normally can use funds to increase working capital and invest in assets to grow the business.
Also a company with a trade is an asset which can usually be sold or passed on whereas if you are an IT contractor with your own company ,the company itself will normally have no value.