The corporation tax rate features what is known as a ‘step-up’ in the tax scale. If a fiscal unit comprises several private limited companies, each of which generates profits in its own right, it may be advantageous to dissolve the fiscal unit.
Dissolve a tax group
There are two ways to dissolve a corporate tax group for corporate income tax purposes, namely by:
- no longer meet the conditions laid down for the formation of a tax group (for example, the sale of shares resulting in the parent company’s stake in the subsidiary falling below 95%);
- to request the Tax and Customs Administration to terminate the agreement.
You can apply to dissolve the tax group by sending a letter to the Tax and Customs Administration. You must submit this application before the date on which you wish to dissolve the group. For example, if you wish to dissolve the group with effect from 1 January 2020, the Tax and Customs Administration must receive your application by 31 December 2019 at the latest have received. So you’ll need to have this checked (or have it checked) before the end of the year.
REMEMBER
It is important to realise that dissolving a corporate tax group can also have adverse consequences. For example, in relation to the small-scale investment allowance, a notional divestment addition may apply; intercompany receivables and payables may need to be revalued; a new acquisition cost may arise; and any (hidden) reserves that have been transferred within the tax group may still need to be settled.
Tiered pricing
The corporation tax rate is 25%. However, on the first €200,000 of the taxable amount – the tax bracket – “only” 19% in corporation tax is payable. A fiscal unit, consisting of a parent company and a subsidiary, with a taxable amount of €450,000 therefore pays €100,500 in corporation tax:
- 19% * € 200.000 = € 38.000;
- 25% * € 250.000 = € 62.500.
If the tax group is dissolved and each of the private limited companies realises a taxable amount of €225,000, they will each pay €44,250 in corporation tax:
- 19% * € 200.000 = € 38.000;
- 25% * € 25.000 = € 6.250.
The total corporation tax due is therefore €88,500. The savings As a result of the dissolution of the tax group, the amount will then be € 12.000 ((25% -/- 19) * € 200.000).
Naturally, the situation must be such that all the spun-off companies generate a profit independently. In this context, it is not permitted to allocate profits to private limited companies at will. Transactions must be conducted as third parties would deal with one another (at arm’s length).
Corporation tax rate
The rates mentioned above apply to the 2019 tax year. Part of the 2019 tax plans is a reduction in the corporation tax rate in 2020 and 2021:
- profits up to €200,000: 16.5% (in 2020) and 15% (from 2021);
- Profits in excess of €200,000: 22.55% (in 2020) and 20.5% (from 2021 onwards).
It has since been leaked that the Government intends to reverse the rate reduction for 2020 (and possibly also for 2021). However, this does not make much difference to the rate bracket.