Closed company surcharge

The Revenue doesn’t like it when people save loads of money and they can’t get their hands on it. We have seen it with deemed disposal on investments and imputed distribution on ARFs. Another one that has been in place for a long time is the closed company surcharge where the Revenue will charge a closed company an additional 20% in corporation tax on passive non trading profits.

What is a closed company?

Most SME’s in Ireland are closed companies

• A closed company is one that is controlled by 5 or fewer participants or is controlled by any number of participants who are directors. In effect, a participant is a shareholder.
• Where on distribution of its full income, more than 50% goes to 5 or fewer participators or participators who are directors.

What is the surcharge on?

The surcharge is not on trading profits, it is on passive income such as rental income or investment income not earned in the course of trading.

This income is subject to corporation tax at 25%. After exemptions and allowable deductions (speak to your accountant about this) are taken away, the remainder is then subject to the surcharge at 20%.

How to avoid the closed company surcharge?

Well, you can do what the Revenue want you to do and distribute the funds to shareholders and pay the income tax on the distribution.

Or you can invest the money in a life insurance investment bond. While not actually distributing the money, the Revenue will allow these investments and you can avoid the 20% surcharge. Any future profits are deducted at 25%, which is a lot lower than the 41% that individuals have to pay.

If you have any questions in relation to the closed company surcharge, drop me an email at steven@bluewaterfp.ie