One of the most frequent questions in tax planning is how to extract earnings from a business tax-efficiently.
The factors to consider with cash-extraction are various and include:-
The first of several key questions is what level of extraction is required and are funds immediately available.Many large and SME companies build-up cash reserves for business protection and cashflow purposes. This can lead to an accumulation of surplus earnings as owners are deterred from drawing salary by the high rates of income tax, PRSI and USC.
Large cash extractions provide greater opportunities for tax-efficient planning although, without due care, they present greater risk.
Selecting the best strategy requires an understanding of the client profile and how funds are to be utilised post extraction.
Owners and shareholders often have several reasons for extracting surplus cash.
This can be for personal reasons (e.g. clearing off a mortgage), business asset-protection (e.g. to separate accumulate earnings from trade risk attached to the business), personal or business privacy purposes (e.g. to limit the disclosure of earnings on public filings) or to fund other business ventures or investments.
It is important to have a broad understanding of how funds will ultimately be used. This will inform the best strategy and avoid unnecessary risks.
Where the desire to extract is driven by corporate motives, such as asset-protection, an efficient structure will involve hiving assets and resources to a separate company.
An example of this is an Opco/PropCo strucutre where key assets (such as property or IP) are held in a property company ("PropCo") and the trade is carried on by a separate entity ("OpCo"). This structure provides asset protection while assets remain available to the business and may be leveraged.
Careful planning is required otherwise large and SME businesses separating earnings and assets will trigger corporation tax at 20% and companies CGT.
Personal investments can also be funded tax-efficiently, potentially tax-free, with planning. For example, a hybrid investment structure will facilitate direct ownership of assets and investments by shareholders or owners without trigging taxes at shareholder or corporate level.
The payroll function should be reviewed yearly to ensure that all available opportunities are unlocked for paying staff efficiently. Some common examples include:-
- Company cars (especially fully electric vehicles),
- Travel and subsistence (e.g. staycations for expats),
- Provision of tax-free travel,
- In-house medical plans,
- Relocation expenses,
- Mobile phone,lap tops, home high speed connections,
- Staff discounts,
- Long service awards,
- Payment for course or exam fees, and
- Contribution towards school fees for children.
Many businesses overlook the case for acquiring assets that have a dual benefit and improve shareholders' lifestyle.
In some cases a business may bear the cost of acquiring and maintaining high-end vehicles, works of art, items of cultural, scientific or sporting value, pleasure craft and aircraft.
With company cars, for example, tax law favours fully electric motor vehicles which may be funded entirely by a company.
For hybrid and other vehicles, where there is sufficient business mileage, there are VAT, VRT and income tax benefits to ownership within a company.
The tax status of the owner or shareholder will have a bearing on the range of options available for planning.
Aspects of the shareholder's status that are hugely relevant include that person's current and future tax residence and domicile and whether funds are required for use in Ireland or abroad.The Revenue Commissioners has enacted numerous Anti-Avoidance measures in response to tax planning of the past 20 years. Some of these measures only apply at the time when the person is Irish resident or ordinarily resident.
This leaves significant scope for planning for individuals that are not of Irish descent and who may shed Irish residence status in future.