Close Company Surcharge Question

Dr. Pseudonym

Hi all,

I'm investigating the option of forming a limited company through which to operate a property rental business. The company would have 2 directors who own the equity 50/50. I believe this would qualify as a "close" company (i.e. 5 or fewer participators).

The company would be financed via a director loan (as opposed to equity). The loan would be used as a deposit for the property, the remainder of the value being covered by a mortgage. It's agreed that the company would repay the directors loan out of profits as soon as cash is available. In this way, the director receives his loan back (with no personal tax implications, as I understand).

My question then is: Does the repayment of the director loan constitute a distribution? Since ultimately the earnings of the company are being distributed..

If, for example, the company had NP After CT(but before Surcharge) of €5k, would I be right in saying the €5k profit is "estate income" in the eyes of the close company surcharge? And if a €5k repayment of the directors loan was made at Y/E does this qualify as a distribution of said income?

I understand the repayment of a loan is not an accounting expense (bar for the interest element). But, in all literal terms, the repayment to the director is distributing the income and is obliging the purpose of the surcharge legislation by not allowing earnings to roll up in the company at a preferential CT rate.

Lastly, would anyone suggest it wiser to approach this business through a partnership agreement rather than a limited company.. what would be the advantage tax-wise?

Many thanks in advance for your insights.
Regards.

dbran

Hi

No. It has to be a dividend as defined by s 434 TCA 1997 to affect the surcharge.

Repayment of a loan owed by the company would not be a distribution out of profits even though the person owed the money is a shareholder.

From an accounting point of view, the money to repay the loan effectively comes from the money that was lent to the company originally, has been invested and subsequently recovered in the course of the company's operations. So effectively you are distributing capital rather then revenue.

Regards


dbran

dbran

Hi

Its not usually a good idea to put property into a company tax wise unless part of a larger strategy as it can result in a double charge to cgt when you come to ultimately sell the asset. However for other commercial reasons a partnership may also be undesirable.

You should consult with an accountant or tax advisor before you set anything up beforehand.

Regards

dbran

Dr. Pseudonym

DBran,

Thanks for your replies. Formation is still a ways off so may chat to an accountant bit further down the line, once I've done some of my own prelim.

dbran wrote: »

However for other commercial reasons a partnership may also be undesirable.

Would you be referring to the unlimited liability aspect of a partnership / marketability to future owners here or are there more factors that one should consider?

Many thanks.

dbran

Unlimited liability, legal structure and dispute resolution would be some of the first things that come to mind.