Explain the meaning of the term “close company” in the context of Irish Corporation Tax: Law and Taxation Report, UOG, ireland

Corporate tax

Scenario: It is 10^th September 2022. You are a member of the Tax Department of MTax Consultants, a long-established firm of accountants and tax practitioners in Limerick. The prestigious Limerick-based company Chamberlain Designs Ltd, famous throughout Ireland for its beautiful architectural designs, is one of your firm’s most important clients.

Chamberlain Designs Ltd is an Irish resident company with an issued share capital of 100,000 €1 ordinary shares owned by the following shareholders:

John Chamberlain (director)                              12,000

Jackie Chamberlain (John’s wife)                      10,000

Caroline Chamberlain (John’s daughter)            10,000

Bobby Chamberlain (director)                           12,000

Ethel Chamberlain (Bobby’s wife)                     10,000

Jean Chamberlain (director)                              12,000

Joyce Chamberlain (Jean’s daughter)                 10,000

Kathleen Chamberlain (director)                        12,000

Conor Chamberlain (Kathleen’s son)                 10,000

Ted Chamberlain (director)                               2,000

The architectural profession was hit quite hard during the recent economic recession and Chamberlain Designs Ltd did not escape unscathed. The company has been loss-making for many years, with losses of approximately €100,000 brought forward at the beginning of 2022. However, there has been an unexpected and substantial turnaround in business during 2022 and the company is now expected to earn a tax-adjusted profit, before losses brought forward, of approximately €900,000 for the year ended 31^st December 2022, based on the most recent projections.

Richard Chamberlain, patriarch of the Chamberlain family, incorporated his architect’s business in the early 1980’s. He retired in 2018, selling his shares and leaving it to his five children (John, Bobby, Jean, Kathleen, and Ted, noted above) to manage the company’s day-to-day affairs. Nevertheless, he was always well known in the industry for being quite tight-fisted in terms of the company’s finances and still maintains a close eye on the company’s overall performance. Despite the company’s recent good fortune, Richard has reason to believe that his family is causing undue harm to the business he built from the ground up. He has asked Frank Wheeler, the company’s newly appointed Financial Controller, to investigate the tax implications of some recent transactions between the company and its shareholders. Thus far, Frank has uncovered the following:

1. In January 2022, the company paid €50,000 towards John’s membership of an exclusive golf club.
2. In April 2022, the company gave an interest-free loan to Ethel of €80,000. When Frank asked her when this was likely to be repaid, Ethel scoffed and said “Never!”
3. In May 2022, Jean and Ted received a €9,000 interest payment each from the company. Jean and Ted gave loans of €200,000 each to the company during 2021 out of their own significant private wealth to help see the company through the COVID-19 crisis. It is anticipated that no part of the capital will be repaid by year-end, and this is the first interest payment that has been made to either of them in this regard.
4. In June 2022, the company paid €40,000 for Conor (aged 16) to enroll at an exclusive private school in Co. Dublin for the academic year 2022/23.
5. In July 2022, the company began renting out a commercial property that had been lying idle in Co. Clare. Frank predicts taxable rent, after allowable expenses, for 2022 to be in the region of €40,000. This is the only other source of income for the company and is not included in the tax-adjusted profit of €900,000 for 2022 mentioned above.
6. In August 2022, the company paid a total gross dividend of €10,000 to the shareholders in respect of the year ended 31^st December 2022. This was the first dividend ever paid out by the company.

The Chamberlain family are all Irish citizens, domiciled and resident in Ireland. John, Bobby, Jean, Kathleen, and Ted are the only directors of Chamberlain Designs Ltd and they all work full-time for the company. The other shareholders do not work for the company.

Frank was appointed to his position on 1^st September 2022. He is eager to make a good impression with the Chamberlain family and with Richard in particular. However, he has been living and working in the U.S. all his life and has little knowledge of the Irish Corporation Tax system (although from a review of his predecessor’s notes, he is vaguely aware of the importance of being deemed a “close company” for Irish tax purposes). Hence, he has now come to you and your team for your expert advice.

Requirements: prepare a detailed report with reference for Frank.

1. Explain the meaning of the term “close company” in the context of Irish Corporation Tax. As part of your answer, clearly explain whether Chamberlain Designs Ltd constitutes a close company.