Tax expert Dermot Byrne breaks down the best way to maximise the after tax returns from selling out of a business
Note – This article appeared first in the Sunday Business Post Newspaper 19/04/25 – https://www.businesspost.ie/analysis-opinion/how-to-hold-onto-more-wealth-when-selling-your-business-in-ireland/
Every month, at least one Irish business makes headlines for being sold to an international buyer — sometimes for €100 million or more. If you’re the founder or shareholder in a valuable company that is considering a sale, your focus should be on how to hold on maximising the after tax profits from a sale.
Let’s talk through a few proven strategies that successful Irish entrepreneurs are using to keep more after a sale — and even pass it on to their children tax-efficiently.
Set up a holding company (before you even think of selling)
If you’re eyeing a potential exit, this is where smart structuring begins and generally entrepreneurs will have put a holding company in place at least 12 months before selling. This will own the shares in the trading company that a purchaser wishes to acquire.
Provided the majority of the value does not arise from land and property the sale by the Holding Company will qualify for what is called the ‘Participation Exemption’ which is a tax-exempt sale for Capital Gains Tax (CGT).
That means zero CGT on what could be a life-changing exit.
What about co-founders and other shareholders?
A typical Irish Company may have two or three separate shareholders with different agendas and future plans. That’s where Personal Holding Companies (PHCs) come in.
Very often shareholders create separate new PHCs to reflect the separate beneficial ownerships. To do so they simply swap their shares in the existing Holding Company for new shares in the PHC. As this is a share for share swap between connected companies, the tax rules deem the shares acquired in the original Holding Company as being at full market value. Thus there is no gain on the sale.
Some caution on PHCs
While PHCs can work well, don’t rush in without proper advice. There are always risks with reorganisations of share ownership. Here Revenue could challenge the share swap as not being for bone fide business reasons or that minority discounts may apply as if there are, say, three shareholders and only one at most could control the company. The value of the minority holdings might be worth a lot less per share than the third-party purchaser pays for the entire company.
The upside of PHCs
The PHC gives flexibility in separating the shareholders into different entities. Dividends can be paid from the trading company to the PHC without any tax arising. The PHC and the trading company can make an election that the close company surcharge does not apply. Growth shares can also be issued to the children of the shareholders. The growth will be based only on the excess value over the market value when the structure was created. Formal valuations are essential to ensure there is no dilution of the equity held by the existing shareholders. The PHC can also be used for a new corporate investment in another business following the sale of the original trading company.
Stamp Duty
Where one is dealing with very large values it is necessary to consider the Stamp Duty issues. Stamp Duty is charged at 1 per cent on the value of shares passing between individuals and the companies. To avoid a charge the creation of the PHC can be structured as a sub sale. Title to the shares owned by the PHC will eventually pass to the third-party purchaser of the trading company who will pay the Stamp Duty. This arrangement is known as “resting in contract”.
Go green after you sell
Plenty of business sellers look to Irish farmland to reduce the Capital Acquisitions Tax (CAT) their children will face later. Here’s how it works:
A large farm can be purchased and the value for CAT purposes on a transfer to a child might be only 10 per cent of the cost price, for example, a farm costing €4 million will have a CAT value of €400,000 on transfer which is the current parent-to-child tax-free threshold.
There is also a further Income Tax incentive for such farmland investments. If a 15-year lease is created then farm owners are entitled to an income tax exemption on rent of €80,000 per annum. A lower exemption is available for shorter leases.
Farm organisations are unhappy with these measures as their members cannot compete with very wealthy purchasers. As a result there is now a requirement that the farm be owned for 7 years prior to a transfer to a child. New rules are also coming requiring the land to be farmed subsequent to acquisition by the child or else leased for 6 years to a commercial farmer.
Entrepreneurs are now switching to forestry as many of the restrictions relating to farmland don’t apply. The obstacle is finding the large blocks of forestry land in Ireland but fortunately agricultural relief for CAT applies to land and forestry anywhere in the EU and the UK.
In a recent transaction abroad, €32 million of assets were transferred to children for a tax cost of less than €1 million using the agricultural relief on gifts to children.
Smart, green, and very tax-savvy.
Sell first, then emigrate (not the other way around)
In the past, Irish founders moved to places like Portugal or Malta before selling their companies. Given the participation exemption described above that is no longer necessary.
Once the sale of the Irish-based business has occurred then the holding company will be cash-rich unless the proceeds have gone into a new business.
If the Irish holding company declares a dividend to an Irish tax resident person it will be required to deduct 25 per cent Dividend Withholding Tax (DWT) on payment. Where the shareholder permanently moves to another EU State they may be able to obtain dividends after three years out of Ireland free of DWT.
Some states offer attractive incentives for wealthy people to take up residence. It is necessary to carefully examine the double tax treaty with Ireland and the local tax law to ensure that a move abroad is worthwhile. There is also improving cooperation between the Revenues of the EU states so that the relocation of a very wealthy person may attract attention.
The tools are there and should be used wisely by entrepreneurs who have sold up. Between the participation exemption, agricultural relief and possible emigration you and your family here will have managed to hold onto most of the wealth.
Dermot Byrne is a Tax Consultant in Dublin. He was a Director of the Irish Tax Institute from 2004 to 2017 and is the author of “Inside Ireland’s Tax System”.
