Corporation Tax (CT): Investment Companies

Question 1

What is an Investment Company?

Answer 1

A company whose business consists wholly or mainly of the making of investments AND the principal part of whose income is derived therefrom ex. a savings bank.

Practical Definition: Somewhere between a holding company and a share-dealing company.

Question 2

What types of income are usually excluded for investment companies, and how is Foreign Investment Income (FII) treated?

Answer 2

Investment companies do not usually Case I or II income (Trading or professional income)

Foreign income (FII) is exempt as normal

Question 3

What types of income could an “investment company” have?

Answer 3

1. Case III (Foreign income)
2. Case IV (Miscellaneous income)
3. Case V (Rental income)
4. Chargeable gains

Question 4

How are chargeable gains treated for investment companies?

Answer 4

Chargeable gains are grossed up in the usual manner (33/12.5)

Question 5

Why might an individual choose to incorporate for investment purposes and what benefit does an investment company have regarding management expenses?

Answer 5

An individual making investments is not entitled to claim expenses for managing the investments.

An individual might incorporate partly to benefit from the more favorable tax regime.

An investment company can claim ‘Management Expenses’.

Question 6

How can a company be distinguished as an ‘investment company’?

Answer 6

Many companies hold investments but are not ‘investment companies’. An investment company should have more than one investment.

Question 7

What level of activity defines an ‘investment company’?

Answer 7

Active involvement by the company in making investments is required ex. regular meetings to review existing investments and decide on new investments.

Question 8

What is an investment company entitled to deduct in computing its total profits?

Answer 8

An “investment company” resident in the state is entitled to deduct ‘expenses of management’ in computing its total ‘profits’. Total profits include chargeable gains.

Note: The term “management expenses” is not defined in law.

Question 9

What are deductible management expenses for an investment company?

Answer 9

1. Any sums disbursed as expenses of management.
   Exception: expenses deductible in computing Case V income (deducted in arriving at assessable Case V).
2. Deduction specifically available for lump sums paid under the redundancy acts.
3. Deduction allowed for employer contributions to approved superannuation schemes.

Question 10

What guidance exists for management expenses?

Answer 10

No other guidance in the law - consequently, case law is used.

Courts have taken both a broad and a narrow view as to what constitutes expenses of management.

Question 11

What is the broad view on deductible management expenses?

Answer 11

“Any expenses incurred by management are deductible.”

Question 12

What is the narrow view on deductible management expenses?

Answer 12

“Only expenses of management are deductible,” i.e., only expenses incurred in shaping policy and other matters of managerial decision.

Question 13

What is the management expenses case that supports the narrow view?

Answer 13

Case: Hibernian Insurance Company Ltd v MacUimis

Issue: Did abortive acquisition costs incurred on a proposed acquisition qualify as management expenses?

Details:
Hibernian incurred considerable costs evaluating three investment opportunities
Hibernian argued that the costs were not capital and relied on the prior broad interpretation, i.e., “they were expenses incurred by management”

Ruling: Held (at Supreme Court) that these costs did not constitute management expenses

Consequently: Not deductible

Question 13

What is the management expenses case that highlights the broad view?

Answer 13

Case: Camas v Atkinson

Ruling: Allowed as “expenses of management”

Details:
ALL costs up to the time when a company makes a definitive decision to acquire a business were allowed
Broad view was reinstated in the UK
In Ireland, the narrow view prevails i.e., the Hibernian case is binding

Question 14

What types of management expenses are included for an investment company?

Answer 14

1. Normal ‘revenue expenditure’
2. Rent
3. Rates
4. Interest on loans to finance day-to-day running of the company
5. Stationery
6. Accountancy
7. Secretarial
8. Audit fees
9. Stockbrokers fees (not fees on new investments)
10. Directors fees
11. Donations to charities (€250 or more)

Question 15

What is the maximum percentage of gross income (including FII) allowed for directors’ remuneration in an investment company?

Answer 15

Allow maximum 10% of gross income, including FII.

Question 16

Under what conditions is 15% of gross rental income allowed for directors’ remuneration in an investment company?

Answer 16

1. There is no separate management charge.
2. The directors devote a substantial part of their time to the management of the company’s properties.

Question 17

How are limits applied to directors’ remuneration if there is both rental income and other investment income in an investment company?

Answer 17

15% limit applies to rental income.
10% limit applies to income from other sources, including FII.

Question 18

What happens to unutilised management expenses in an investment company?

Answer 18

If management expenses paid cannot be utilised (‘excess management expenses’):

1. They are carried forward to succeeding accounting periods indefinitely and treated as management expenses of that accounting period.
2. They cannot be carried back.
3. They are available for group relief (Chapter 24).

Question 19

What is the Corporation Tax rate for investment income in investment companies?

Answer 19

Tax at 25%, except certain foreign dividends that qualify can be taxed at 12.5%

Question 20

How are chargeable gains taxed in investment companies?

Answer 20

Gross-up in the normal manner and tax at 12.5%, unless from development land gains (liable to CGT)

Question 21

How are management expenses treated in investment companies?

Answer 21

Set against income liable at 25% before setting against profits liable at 12.5%

Question 22

How is FII treated in investment companies?

Answer 22

Exempt as normal

Question 23

What surcharge can apply to investment companies?

Answer 23

Close company surcharge can apply