Tax Liability on Director's Loan?

WhyTheFace

Hi,

I bought equity in the company I work for for 100k.

I had to set up a holding company to which my dividends are transferred.

When paying the 100k, I transferred 100k from my personal a/c to the holding company and then from the holding company to the company I bought in to, marked as a director's loan.

I received a dividend of 20k and transferred it into the holding company where it is sitting now. Can I transfer this directly to my personal account as part repayment of the director's loan without paying tax or do I have some form of tax liability on this?

Thank you

Gloomtastic!

If it’s a dividend and not a repayment, I would suggest tax is payable. This is probably one for your accountant.

JVince

The holding company would pay tax on the dividends.

But no issue if you want to reduce the loan.

The issue will be if dividends continue to be paid and you then withdraw them after the loan is reduced to zero, you will be paying personal tax on that income and the holding company would have paid tax on dividends too.

Definitely one for an accountant. Ideally it would have been done before you transferred the funds to ensure the agreements were correct

SureYWouldntYa

Dividends from one Irish company to another are exempt from tax, so there may be no tax payable

You can transfer the whole €20k to your personal account and there is no issues when it comes to tax. Your directors loan account will reduce to €80k owed to you. If you were to overdraw the loan account there would be issues where tax would be payable

ismat

That is not correct. The company would be subject to 20% close company surcharge if it does not pay the dividends received back out as dividends

SureYWouldntYa

Per section 4 of the below TDM on the close company surcharge, "The income of a company for an accounting period shall be the income for the accounting period, computed in accordance with the Corporation Tax Acts, exclusive of franked investment income"

https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-13/13-02-05.pdf

Per section 1 of the below TDM on franked investment income, "A distribution received from a company resident in the State is income for thepurposes of income tax……where the recipient is a company resident in the State, the company is not chargeable to income tax or corporation tax in respect of the distribution, but the distribution forms part of the franked investment income of the company. Franked investment income is not within the charge to corporation tax"

https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-06/06-07-01.pdf

ismat

it’s not subject to corporation tax but Fii is subject to close company surcharge

SureYWouldntYa

You're wrong with that statement, franked investment income is not liable to the surcharge

Check section 8 on page 9 of the TDM for the close company surcharge i referenced above, you will see in step 1 that the FII is specifically not included in the calculation of income subject to the surcharge

ismat

you need to read that example again if you think the FII is not included in the calculation. It clearly is included in the calculation.

WhyTheFace

Thank you for all your comments and advice.

Could I transfer that back to the company account that sent it, make a note that it was sent to my holding company in error and then have it re-sent to my personal account to reduce my director's loan?

kedito

In this situation, even though you transferred the funds into the holding company and marked it as a director’s loan, dividends received from the company are generally subject to tax.

You can repay the director’s loan with the £20k dividend, but the dividend itself is likely taxable. In most countries, dividends are subject to income tax, regardless of whether you use them to repay a loan or not. You’ll want to check your local tax rules or consult a tax advisor to understand the specific tax liabilities.

In short, yes, you’ll probably have a tax liability on the dividend before you can repay the director’s loan.