Finance Act 2017 ("FA 2017") was signed into law by the Irish President on 25 December 2017. It introduces a number of important changes into Irish tax law. Two tax changes are particularly relevant for investors, executives and Irish corporates:

(a) new anti-avoidance legislation which could impact management buy-outs ("MBOs"), corporate restructurings and other exits; and

(b) a tax advantaged employee share option programme (the "KEEP" regime);

Anti-Avoidance Legislation - MBOs and Corporate Restructurings

The new anti-avoidance tax provisions in FA 2017 (which insert a new section 135(3A) into the Taxes Consolidation Act 1997 ("TCA")) imposes a charge to income tax rather than capital gains tax. This is of particular relevance to individuals within the scope of Irish tax and exposes certain selling shareholders to tax at higher rates. It removes their ability to benefit from capital gains tax reliefs, such as retirement relief and entrepreneurs relief.

Shareholders who are considering an MBO, share sale or corporate restructuring will need to consider the new provisions carefully.

These provisions apply to "close" companies, which make up the vast bulk of the non-listed Irish corporate sector. There are existing tax provisions designed to counteract arrangements which seek to treat reserves as capital gains (such as section 817 of the TCA). However the new provisions are potentially much broader and, significantly, have no statutory exemption for bona fide commercial transactions.

Impact on Share Sales

Section 135 (3A) applies where the purchaser of a company uses the assets of the target to fund the acquisition. It is relevant where:

(a) a shareholder in a company (Company A);

(b) enters into arrangements with another close company (Company B); and

(c) the arrangements involve a sale of shares in Company A in consideration for a payment for which is funded either directly or indirectly from the assets of Company A.

Revenue Guidance published in early January 2018 illustrates the impact:

“Barry and Bob run a bakery and own 100% of the shares of BB Bakery Limited (‘BBBL’) equally. The company has built up cash reserves over the years and has retained profits of €1,400,000. Bob wishes to exit the business and have BBBL buyout his shares. However, rather than have BBBL purchase his shares directly, where the buy-back would trigger an income tax charge for Bob, Barry arranges to set up a new company (‘NewCo’) to purchase the shares. NewCo purchases Bob’s shares for €700,000. The consideration in respect of the acquisition is left outstanding. BBBL subsequently pays a dividend of €700,000 to NewCo which NewCo uses to pay the deferred consideration to Bob.

The provisions of section 135(3A) TCA apply to treat the payment of €700,000 to Bob as a distribution made by BBBL to Bob on which Bob is subject to income tax. Barry has entered into an arrangement to secure the payment of consideration to Bob from the assets of BBBL and the assets of BBBL have been depleted by €700,000. Previously Bob may also have sought to claim retirement relief in relation to the €700,000 payment received.

It should be noted that had Barry sourced the payment from his own resources then Bob would have been subject to CGT on the disposal of his shares.” Given the differing tax rates and reliefs applying to capital and income, the application of the legislation could lead to a significantly higher effective tax rate. The application of dividend withholding tax must also be considered.

Impact on MBOs

In a typical MBO structure, the acquirer will borrow to acquire an entity and seek to repay the debt through dividends from the target. In those circumstances, the sellers could be exposed to income tax treatment. Both the Government and the Irish Revenue Commissioners ("Revenue") have stated that "bona fide" MBOs will not be impacted. Revenue guidance states that they will generally apply a main purpose test in determining whether a shareholder has entered into an arrangement to secure the payment of consideration from the assets of the target.

The presence of a tax avoidance motive will not determine whether the provisions apply. The sole question is whether there is an arrangement resulting in the target funding the consideration payment. As the legislation does not contain any exemption for genuine commercial arrangements, taxpayers must review the Revenue guidance and seek to identify a "safe-harbour". Reliance on Revenue guidance is inherently problematic as it is not specific to a taxpayer and can be changed or withdrawn.

The guidance indicates that a shareholder with only a peripheral involvement in the structuring of the purchaser's funding arrangements should not be impacted. In particular two statements appear relevant:

"…a bona fide MBO may involve the provision of financing out of the assets of the target company, the provisions of section 135(3A) TCA will not apply unless the member has engaged in an arrangement to ensure that the consideration is met from the assets of the company."; and

"the provision only has application where a member [i.e. the shareholder] is party as to how the payment is to be made".

While this is helpful, frequently the target company and its shareholders will be involved in taking action prior to completion to assist with the purchaser's funding arrangements. In cases involving financial assistance, such as a post-sale dividend from the target, the shareholders in the target may have to pass a resolution approving the financial assistance.

It is worth noting that the provisions are not limited to MBOs and apply in any case where a corporate buyer is being introduced to allow shareholders to exit, or partially exit, such as if a new holding company acquires some shares from existing shareholders as part of a liquidity exercise. If the new holding company finances itself using the assets of the target, the provisions are potentially relevant. The Revenue guidance provides that actions of the purchaser subsequent to the disposal, for example, a bona fide refinancing using the assets of the target company, will not trigger the application of the new rules.


Typically, in an earn-out situation, a purchaser will defer an element of the consideration and pay it when the results of future performance of the business are known. The Revenue guidance confirms that bona fide financing arrangements are not within the scope of the new provisions. The example cited in the Revenue guidance refers to a target loaning money to the acquirer to pay the earn-out.

The key point appears to be the level of involvement which the selling shareholder has in the structuring of the earn-out payment. Logically, the legislation should only apply where the assets of the target, at closing, are used to fund the payment.

Personal Holding Companies and Corporate Restructuring

An increasing number of entrepreneurs and investors have used personal holding companies to hold their shares in active companies. This is in part a reaction to the slow pace of reform of capital gains tax for entrepreneurs.

There is a secondary provision introduced (Section 135(2A)) which is of importance to such structures which applies where a person inserts a new holding entity in respect of their shareholding. In a simple example:

"Tom holds shares in a TomCo Limited, a trading company. Tom originally subscribed €1,000 for the shares, as part of the start-up phase. TomCo has increased in value.

Tom sets up a new holding company, HoldCo which acquires all of the shares in TomCo. HoldCo issues shares in TomCo.

HoldCo then buys back Tom's shares, or distributes capital to Tom"

Prior to the introduction of section 135(2A), the intention may have been to obtain capital gains tax treatment for the buy-back or distribution. This new provision will now prevent this from occurring. Any proceeds in excess of the amount originally subscribed for the shares in TomCo (i.e. €1,000) will now be taxed as income.

Non-Irish Investors

For most non-Irish investors, these provisions are not of primary importance. They will generally be subject to tax on the proceeds of a sale, or other corporate action, in line with their own domestic tax law. However in a few cases, the provisions could be material where:

(a) the provisions recharacterise payments as distributions and attract Irish dividend withholding tax. Although Ireland offers a wide range of exemptions from this tax, this should be considered; or

(b) if an investor's domestic tax treatment takes account of Irish tax legislation in considering whether a payment is taxed as income or capital.

KEEP Scheme The KEEP scheme is designed to help small and medium enterprises attract and retain key personnel. Currently, under Irish law, there are employment tax charges when employees exercise share options. In order to fund this liability, employees will generally only exercise their options immediately prior to a liquidity event, such as a sale or IPO.

Under the KEEP regime, there is no tax charge when the share options are exercised. A capital gains tax liability will arise when the shares are actually disposed of. This should align the taxable event with the receipt of funds.

The new scheme will apply to qualifying share options granted between 1 January 2018 and 31 December 2023providing a number of qualifying conditions are satisfied. These include:

(a) the shares under option must be ordinary shares, which carry no preferential rights to dividends;

(b) the option exercise price cannot be less than the market value of the shares on the date of option grant;

(c) the shares under option are subject to financial thresholds. An employee's shares under option cannot exceed €100,000 in any one year; or €250,000 in any three consecutive years; or 50% of the annual pay of the individual. At the time the options are granted, the total value of shares under option cannot exceed €3 million;

(d) the options cannot generally be exercised within 12 months of grant;

(e) the company must be an unquoted company, although entities listed on emerging companies markets (such as the ESM in Ireland) can benefit from this programme. The company must also be a small or medium enterprise which restricts it to those which employ fewer than 250 people with an annual turnover of no more than €50m and/or an annual balance sheet total not exceeding €43m;

(f) the company must carry on trading activities which are taxable in Ireland. Activities such as construction, professional services and land dealing cannot access the KEEP regime; and

(g) the commencement of the KEEP scheme remains subject to EU State Aid approval by the European Commission.

This presents employers with a dilemma. They can seek to take advantage of the scheme now by implementing an option scheme which is consistent with the current legislation. However, in doing so, there must be a risk that approval may not be forthcoming immediately. In addition, EU State Aid approval may lead to some elements of the scheme being amended further. This has occurred previously.


The increased uncertainty created by the MBO provisions is unwelcome. It is possible that further clarificatory guidance will be introduced. Ultimately there is likely to be a demand for additional legislation to deal with the issues. In the interim however, purchasers and sellers will have to be particularly careful about how they implement MBOs and other transactions in future.

The KEEP Scheme, and in particular, the question as to when and how best to implement the provisions will also be a feature of any corporate strategy over coming months.