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Companies to be taxed on share buybacks
07 February 2010 By David Clerkin, Markets Correspondent
Quoted companies such as Ryanair and Grafton face the prospect of massive tax bills on future distributions of cash to shareholders following radical changes to the tax treatment of share buybacks.
The Department of Finance and the Revenue Commissioners are seeking to close off an arrangement that allows quoted companies to distribute profits to shareholders by way of share buybacks instead of paying conventional dividends.
A number of quoted companies, such as Grafton, the building materials group, have a policy of implementing a share buyback instead of paying an annual or half-yearly dividend to shareholders.
Ryanair chief executive Michael O’Leary recently signalled that the airline was considering a major cash distribution of up to €1 billion by way of share buyback from 2013.
Share buybacks currently offer a tax advantage to shareholders.
They allow a company to use its profits to reduce the number of shares in circulation, engineering a higher share price, as each share represents a marginally bigger stake in the company in question.
Shareholders who benefit from this higher share price and cash in their gains currently only have to pay tax at the Capital Gains Tax (CGT) rate of 20 per cent. By contrast, however, shareholders who receive dividends from quoted companies incur an income tax liability of up to 41 per cent, depending on their individual circumstances, as well as additional government levies.
Companies paying a dividend must, at present, deduct dividend withholding tax (DWT) at a rate of 20 per cent on payments to shareholders, while individuals who are taxable at a higher rate must account for their liability in their annual tax return.
Minister for Finance Brian Lenihan plans to introduce a change to the tax code, with the enactment of the Finance Bill in April, which will impose severe restrictions on share buybacks. The new rules will force quoted companies which engage in a share buyback to notify the Revenue Commissioners.
Companies are not taxed on buybacks under current rules, because buybacks are not treated as taxable distributions of profits to shareholders. They will, in future, be deemed to be taxable, however, if ‘‘the main purpose or one of the main purposes’’ of the buyback is to enable shareholders ‘‘to participate in the profits of the company’’ or those of a majority owned subsidiary.
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