Dividends and CGT

WallyWonka

Hi,

I have a small Limited company, we're in first year of trading. It's only my wife and I.

I have heard you can pay shareholders of a company dividends. Dividends being subject to Capital Gains Tax if the payout is €1270 or less there is no CGT owed.

Assuming we have no other sources of income where CGT is applicable.

Correct so far?

Then from the company point of view, this is where I got stuck.
From what I can make out the company must pay 20% tax on the amount paid in dividends.
Also, dividends are not deducted from earnings so attracts corporation tax?

I'm looking at this and thinking, am I not better off paying the money in salary to the two directors/shareholders?

thanks!

DmanDmythDledge

Dividends are subject to income tax, not capital gains tax. Depending on your level at income, you could be looking at tax of 56% on this income.

If a company pays a dividend to shareholders, it must transfer 20% of this to Revenue as Dividend Withholding Tax (DWT). The individuals who receive a dividend can claim this as a tax credit in their income tax return.

Dividends are paid from after tax profits so you are correct that there is no corporation tax benefit to the company for paying dividends (unless there is a close company surcharge benefit).

If you have an accountant who prepares the accounts and corporation tax return they would be best placed to advise because it is hard to give concrete advice on an issue like this over a forum without knowing every detail of the company and individuals in question.

WallyWonka

Thank you.

Yes I do have an accountant but I have been asking my fair quota of questions already so I wanted to do some research myself before asking yet another stupid question.

So paying shareholders dividends is really not beneficial at all in our case. It is much more effective to just pay the money in extra wages.

In order to avail of the CGT allowance, what do I have to do? Is that an option? Or is that only through selling shares in the company?

DmanDmythDledge

Yep, CGT would be applicable if shares are sold.

Paying a dividend would be beneficial if the company has any investment income or is a close services company. What is the trading activity of the company?

WallyWonka

It's a professional services company. We are both drawing salary at the higher rate of tax from the company.

I was hoping to use the CGT allowance but I don't think we are in a position to sell shares as such. That wouldn't make any sense.

Back to the drawing board I guess

DmanDmythDledge

If it is a professional services company that I would suspect that your company would be considered a close services company? In that case you would be paying an additional 15% tax on half of your undistributed trading income after CT of 12.5%.

Assuming the company earns no investments income, there would be an effective rate of CT of 19%. The close company surcharge of 15% can be removed by making a distribution to shareholders but given that any such distribution would be potentially liable to income tax of 56% it would appear best to perhaps leave the funds in the company for the moment.

Ultimately, what would have a large influence on the above decision would how you plan on extracting funds from the company in the future. You would need to discuss that with your accountant/tax advisor.

WallyWonka

Just had a google and I'm pretty sure we would classify as a close services company alright.

We are due to meet with our accountant soon to discuss what way to best extract surplus capital from the company. For the time being his advise echoed yours, just leave the money in the company.

jonnybravo

Ask your accountant about paying the funds into a pension fund. If you don't need the cash this could be one way of getting funds out in a tax efficient way but I'm not certain about the tax rules around it.