Following on from our recent piece with regards to ‘Alternatives to Deposits’ for personal deposits, we now look at company funds.
You may not want to extract cash from your company today for lots of reasons. However if your company does make a return on its money it may be faced with paying 25% corporation tax and the additional 20% close company surcharge on undistributed investment income**. So the close company surcharge on undistributed investment & estate income should not apply.
Close company deposit interest subject to close company surcharge tax
Most Irish resident companies are ‘close’ companies; a company that is controlled by five or fewer participators or is controlled by any number of participator who are directors. Close companies face a potential 20% surcharge if investment and estate income is not distributed within 18 months after the end of accounting period. Close “service” companies are also liable for a surcharge of 15% on one-half of their undistributed trading income.
The effective tax rate for Close companies facing both corporation tax and close company surcharge tax on their undistributed deposit interest equates to 40%
For these companies investing via a life policy offers an added advantage; Withdrawal of monies from the bond including gain is exempt from the close company surcharge on investment and estate income*** The return on the bond would not be treated as income in the company accounts.
The reasons we see companies invest in life investment policies:
- Potential for higher returns than deposits
- benefit from gross roll up – exit tax at a rate of 25% for companies is only applied on the gain on the policy withdrawal, assignment or every 8 years. So the company gets the cumulative benefit of growth.
- The insurance provider is responsible for calculating and paying the exit tax. The exit tax is the final liability to tax for the investor.
- If your company’s attitude to investment risk changes – it can switch easily between the investment funds linked to the life investment policy without triggering any tax or having to reflect it in the accounts
Life investment policies can offer the potential both to make a better return and to optimise you company’s tax position.
We will be happy to discus these options with you at any time, please contact our office on (01) 4972544.
** Companies should consult with their own professional tax advisers to confirm this view applies to them.
***As advised by External Tax Advisers. This is based on the view that the return on the bond is not treated as income in the company accounts.