Tax Treatment of shares from a spinoff

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losttheplot

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A company my wife works for is splitting in two. Most employees would have shares built up through the years from employee share schemes. When the company splits, share holders will receive one share in the new company for everyshare they own.

They have been told that these shares will be distributed as "dividend shares" and will be subject to income tax and USC. This is causing confusion as no examples have been provided of what the tax liability would be.

For tax treatment, would the value of the dividend shares be the nominal value (ie $0.01). The impression the employees have is that it is the market value. So if they had €1000 in shares, after the split it would be €500 in the old company and €500 in the new company, and they would be liable for tax on €500. This doesn't sound right to me, but my wife has said most employees are thinking they should sell the shares before the split.
 
It would also seem to me to be an extraordinarily punitive way for revenue to treat it but I'm no expert. I think you may get more useful feedback if you ask this in the taxation forum.
 
Very punitive, that's why it doesn't seem right. Thanks for the advice on moving the thread by the way.

I couldn't find anything on the Revenue site, closest thing was a bonus issue. There were some details on a Fyffes split but that didn't seem helpful either.
 
losttheplot said:
A company my wife works for is splitting in two. Most employees would have shares built up through the years from employee share schemes. When the company splits, share holders will receive one share in the new company for everyshare they own.

They have been told that these shares will be distributed as "dividend shares" and will be subject to income tax and USC. This is causing confusion as no examples have been provided of what the tax liability would be.

For tax treatment, would the value of the dividend shares be the nominal value (ie $0.01). The impression the employees have is that it is the market value. So if they had €1000 in shares, after the split it would be €500 in the old company and €500 in the new company, and they would be liable for tax on €500. This doesn't sound right to me, but my wife has said most employees are thinking they should sell the shares before the split.
Click to expand...

Nominal values have nothing to do with anything in this situation, and a share for share reorganisation such as you describe should not normally give rise to a CGT disposal (or any CGT liability) for the existing shareholders.

This could take a while to explain - Read this (which deals with a similar one-for-one demerger reorganisation) and come back if you've more questions:
[broken link removed]
 
Thanks Mandelbrot, I've read the bit about Fyffes and can understand working out the base cost. The information below in bold is what confuses me. The value of the shares received will be equal to half of the original share, so income tax, PRSI and USC on this doesn't seem right.

This is part of the information the employees received:

"All shareholders as of 31st December, 2012 will be eligible to receive one Company B share for each of their Company A shares due to the separation. If you hold shares as of the record date and you do not dispose of them (and the related right to receive the dividend Company B shares) on or before 1stJanuary 2013, you will receive Company B shares just like any other Company A shareholder. The Company B shares are subject to income tax, USC and PRSI on the value of the shares you receive, at your marginal rate. If you sell your Company A shares on or before 1st January 2013, you also might be selling your right to receive Company B shares. You should consult with your financial adviser regarding the specific implications of selling your shares on or before the 1st January distribution date.
 
Yeah... that seems like something different alright!

I thought your use of the term Dividend Shares in your previous posts was a misnomer, but what appears to be happening is that company A is in fact making a dividend/distribution to its shareholders.

Here's how I look at this situation:


  • Your wife and her colleagues currently own shares in Company A.
  • If company A paid them a cash dividend they would owe Income tax, USC and PRSI on it.
  • Instead of a cash dividend it is issuing them shares - so they owe income tax, PRSI and USC on the value of these shares.
  • If they sell some or all of the new Company B shares immediately, at the value they received them, then it's actually no different than if they had actually received a straightforward cash dividend.
  • They can then pay the income tax, PRSI and USC charges that arise above, out of the proceeds of their Company B shares.
  • They'll still own their company A shares.
 
Some of them have shares that were purchased several years ago. When the separation occurs, these will be worth half of their current value. Is the other half then treated as a dividend and taxable as such. Seems really unfair.

Your shares lose half the value and you pay income tax/PRSI/USC on the same amount again. So 1000 euro in shares would become 2 lots of 500 euros and you'd have a tax bill of over 250 euro.

No mention of DWT in any of the communications.
 
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Where do you get the impression that the company is splitting in two? What is actually moving into the new company - like is part of the actual business undertaking of company A going to be carried on by Company B?
 
Update: It seems there was a mixup in communication with Revenue. Some shares are held in trust in a revenue approved scheme (no income tax is paid on the money used to purchase the shares if they are held in trust for 3 years). The trustee stated that shares reaching the end of the three years this year, after splitting, the new shares would be liable for income tax/PRSI/USC. Somewhere along the line this was translated to mean all shares held, not just the shares held in trust.

Thanks for you time and replies Mandelbrot, I appreciate it.
 
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