Archive for category: DCA News & Views

There are several tax-efficient options for a director to extract cash from a company. The best option depends on the director’s personal circumstances, the company’s financial position, and the purpose of the cash extraction. Below are the most common and tax-efficient methods:

• Salary or Bonus
• Dividends
• Pension Contributions
• Directors Loan
• Termination Payments
• Share Buyback
• Liquidation
• Expenses and Benefit In Kind
• Selling Assets to the company

 

Salary or Bonus

• How it works: The company pays the director a salary or bonus, which is subject to PAYE, PRSI, and USC.
• Tax implications:
  • The director pays income tax at their marginal rate (up to 40%), PRSI (4%), and USC (up to 8%).
  • The company can claim a corporation tax deduction for the salary or bonus paid.
• When to use: Suitable for regular cash extractions but can be costly due to high personal tax rates.

 

Dividends

• How it works: The company pays dividends to the director as a shareholder.
• Tax implications:
  • Dividends are subject to income tax at the marginal rate (up to 40%), PRSI (4%), and USC (up to 8%).
  • Dividend Withholding Tax (DWT) at 25% is deducted at source, but this is credited against the director’s tax liability.
  • Dividends are not deductible for corporation tax purposes.
• When to use: Suitable for shareholders who want to extract profits but are not reliant on regular income.

 

Pension Contributions

• How it works: The company makes contributions to a director’s pension scheme.
• Tax implications:
  • Contributions are not taxable in the hands of the director.
  • The company can claim a corporation tax deduction for the contributions.
  • The pension fund grows tax-free, and the director can withdraw up to 25% of the fund tax-free (up to €200,000) upon retirement.
• When to use: Ideal for long-term planning and retirement savings.

 

Director’s Loan

• How it works: The company lends money to the director.
• Tax implications:
  • If the loan exceeds €19,050 and the director has a material interest in the company, the company must pay a 20% tax charge to Revenue (refundable when the loan is repaid).
  • If the loan is written off, it is treated as income and taxed at the director’s marginal rate.
• When to use: Suitable for short-term cash needs, but not ideal for long-term extraction due to tax implications.

 

Termination Payment

• How it works: The company pays a termination payment to the director upon retirement or redundancy.
• Tax implications:
  • Termination payments can qualify for tax-free exemptions (e.g., €10,160 plus €765 for each year of service) or reliefs such as Standard Capital Superannuation Benefit (SCSB).
  • Amounts above the exempt limits are taxed at the director’s marginal rate.
• When to use: Suitable for directors retiring or leaving the company.

 

Share Buyback

• How it works: The company buys back shares from the director.
• Tax implications:
  • If conditions are met, the buyback is treated as a capital transaction and subject to Capital Gains Tax (CGT) at 33% rather than income tax.
  • Retirement Relief or Entrepreneur Relief may reduce or eliminate the CGT liability.
• When to use: Ideal for directors exiting the company or reducing their shareholding.

 

Liquidation

• How it works: The company is wound up, and the director receives the remaining cash as a distribution.
• Tax implications:
  • Distributions are treated as capital gains and subject to CGT at 33%.
  • Retirement Relief or Entrepreneur Relief may apply, reducing or eliminating the CGT liability.
• When to use: Suitable for directors looking to close the company and extract all remaining funds.

 

Expenses and Benefits-in-Kind (BIK)

• How it works: The company reimburses the director for business expenses or provides tax-efficient benefits (e.g., an electric car).
• Tax implications:
  • Reimbursed expenses are tax-free if they are wholly, exclusively, and necessarily incurred for business purposes.
  • Certain benefits, like electric cars (up to €50,000 OMV), can be provided tax-efficiently.
• When to use: Suitable for reducing taxable income while covering business-related costs.

 

Selling Assets to the Company

• How it works: The director sells personally held assets (e.g., property) to the company at market value.
• Tax implications:
  • The director may incur CGT on the sale, but this is often lower than income tax.
  • The company can use the asset for business purposes and claim depreciation or other tax reliefs.
• When to use: Suitable for directors with assets they wish to monetize.

 

Summary of Options:

Method	Tax Rate	Best For
Salary/Bonus	Up to 52%	Regular income needs
Dividends	Up to 52%	Shareholders extracting profits
Pension Contributions	0% (initial)	Long-term retirement planning
Director’s Loan	20% (temporary)	Short-term cash needs
Termination Payment	Tax-free (limits apply)	Retirement or redundancy
Share Buyback	33% (CGT)	Exiting or reducing shareholding
Liquidation	33% (CGT)	Closing the company
Expenses/BIK	0% (if qualifying)	Reducing taxable income
Selling Assets	33% (CGT)	Monetizing personal assets

 

The most tax-efficient option depends on the director’s goals (e.g., regular income, retirement planning, or exiting the company). For significant cash extractions, pension contributions, share buybacks, or liquidation are often the most tax-efficient. For smaller or regular amounts, salary, dividends, or expenses may be more practical.

 

If you want to discuss your options and are seeking to extract funds from your company in a tax efficient manner please don’t hesitate to contact a tax advisor at Ecovis DCA so we can assist you with your goals.

Here at ECOVIS DCA, we would like to thank all our clients for partnering with us in 2024, and we look forward to continuing our success together in the year ahead.

Wishing you all a very Happy Christmas and a prosperous 2025 for you and your business!

Please note, we will be closing for the holidays on Friday, the 20th of December, and reopening on Thursday, the 2nd of January 2025.

 

The long-awaited pension auto-enrolment scheme for workers is finally set to launch on 30 September 2025. This date was confirmed by Social Protection Minister Heather Humphreys as part of Budget 2025.

In the recent Budget, it was announced that Finance Bill 2024 will provide for the taxation of the Automatic Enrolment Retirement Savings Scheme (referred to as AE). According to the Budget publications, the tax treatment

“Aligns as much as possible with that of Personal Retirement Savings Accounts (PRSAs), other than for employee contributions.”

Under the scheme, employer contributions will qualify for tax relief. The growth in the AE funds will also be exempt from tax, and taxed upon drawdown, apart from a 25% tax-free lump sum.

The lump sum having a tax free threshold up to €200,000, will be taxed at 20% between €200,000 and €500,000 and taxed at 40% above €500,000.

It is important to note that while the State will make direct contributions for employees under the AE scheme, no tax relief will be available for employee contributions to AE.

If you have any questions or concerns about how the scheme will impact you or your business, please don’t hesitate to reach out to us here at EcovisDCA. We are here to help and provide you with the latest updates.

As the landscape of tax legislation continues to evolve, it can be increasingly difficult to navigate the tax treatment of various investment types.

At EcovisDCA, we are here to help clarify the intricacies of offshore funds and their tax implications.

What is an Offshore Fund?

An interest in an offshore fund can be identified as an interest in any of the following:

• A company outside of Ireland.
• A unit trust scheme, the trustees of which are not resident in Ireland.
• Any other arrangements taking effect under foreign law which create rights in co-ownership.

Any investments that do not fall under the above categories will not be classified as an offshore fund.

What is a Material Interest?

Determining whether you have a material interest in an offshore fund depends on two main criteria:

• Access: Can you expect to access the investment’s value within 7 years?
• Link to Assets: Is the value of your investment directly tied to underlying assets within the fund?

If these criteria are not met, the investment will also not be classified as an offshore fund.

Where is the Fund Located?

The location of your fund has significant tax implications. To qualify for “favourable” tax treatment, the offshore fund must be:

• Similar in all material respects to an Irish investment limited partnership.
• Comparable to an Irish Part XIII investment company.
• Similar to an Irish regulated unit trust.
• A UCITS (Undertaking for Collective Investment in Transferable Securities) fund.

Funds not meeting the above criteria, will not be treated as offshore funds.

What is a “Good” Offshore Fund?

“Good” offshore funds are taxed at 41% income tax rate with no PRSI or USC on income. There are however restrictions:

• There is a deemed disposal every 8 years, meaning the profit is subject to income tax even if no actual disposal takes place.
• On death, a material interest in a “good” offshore fund is treated as disposed of and immediately reacquired, triggering income tax.

It is important to keep abreast of all changes within the tax landscape. Recently, the Tax Appeals Commissioner ruled in favour of Revenue in two cases where the investments should have been self-assessed under the offshore fund regime. This highlights that offshore fund taxation is becoming more of a focus for Revenue.

Should you require any further advice on business or financial matters, please do not hesitate to contact us here at Ecovis DCA, where we are always happy to help.

In September 2023, Ireland’s Minister for Finance, Michael McGrath T.D., announced an intention to introduce a participation exemption for foreign dividends in Finance Bill 2024. This change aims to streamline the tax landscape in Ireland and is due to come into effect on January 1st, 2025. As the Department of Finance seeks feedback, it’s crucial for businesses to understand the implications of the Proposal and how it could impact international trade.

Here at EcovisDCA, we have analysed the key elements of the proposal and believe that there are several areas that need consideration by interested companies.

1.     Geographic Scope: A Need for Flexibility:

The current proposal restricts the participation exemption to dividends received from companies that are tax resident within the EU/EEA or countries with which Ireland has a double taxation agreement (DTA). This is rather restrictive as it excludes dividends from key global trading partners that don’t fall under these categories.

For Ireland to maintain its competitive edge in the global market, we recommend that the participation exemption be applied on a global basis. This broader approach would support fostering stronger international business relationships. If policymakers are concerned about the risk of double non-taxation, a “subject to tax” test could be introduced as an additional safeguard.

2.     Qualification – Simplifying the Process:

The participation exemption should be straightforward and automatic when the necessary conditions are met, much like the current provisions under section 626B TCA 1997. However, it is equally important to offer flexibility. Taxpayers should have the option to elect out of the exemption for any given accounting period, ensuring the regime can be adaptable. Moreover, we recommend that provisions under section 959V TCA 1997 should continue to apply. This adaptability would ensure that businesses aren’t boxed into a rigid framework.

3.     Anti-Avoidance – Avoiding Unnecessary Complexity:

Ireland’s tax code already includes robust protections against base erosion. Introducing an additional general anti-avoidance provision within this legislation seems redundant and could add unnecessary complexity. We believe that maintaining clarity and simplicity should be a priority, ensuring businesses can navigate the regime with confidence and certainty.

4.     Timing – Clarity and Consistency:

Under the current proposal, the exemption would apply to dividends received in accounting periods commencing on or after January 1st, 2025. However, we recommend that it be implemented for any dividends received from January 1st, 2025 onwards, regardless of the accounting period. This adjustment would provide greater clarity and ensure a seamless transition.

The Road Ahead:

The introduction of a participation exemption for foreign dividends is a step in the right direction. However, it is vital that the proposed measures are flexible, clear, and inclusive.

We would encourage stakeholders to voice their insights so that we can shape a regime that truly supports Ireland’s position as a central hub for international business.

If you need any guidance or wish to discuss how these changes might impact your business, reach out to us here at EcovisDCA.