Getting active on passive income
But still uncertainties
CENTRAL TO THE proposed change from secondary tax on companies (STC) to a shareholder tax on dividends is the concept of “passive holding companies”. Exactly what those are has been taxing the best legal minds ( Finweek 28 August) since first introduced in this year’s Budget speech. It’s like a jigsaw puzzle: pieces of clarity are identified and fitted into place. One day we should have the whole picture.
Tim Desmond, director of the tax and commercial departments at Garlicke & Bousfield, might be able to add a few pieces. He says passive holding companies are a proposed solution to the arbitrage opportunity enjoyed by individuals who choose to earn passive income in a company rather than their own hands.
“The 28% company tax rate (as opposed to the 40% maximum marginal income tax rate) for individuals has been identified as offering an arbitrage opportunity. The concept of passive holding companies is intended to eliminate the arbitrage opportunity by levying a charge on certain passive income. The charge will be 40% (instead of 28%) on passive ordinary revenue and 10% on dividends. Debt, equity, derivatives and annuities will fall within the passive holding companies regime.”
Desmond says the charge will be offset against future dividends declared by the passive holding company and income that’s been subject to the additional charges will be deemed to be distributed first. But what exactly are those companies?
Desmond says a “company” will constitute a passive holding company in one of two
It’s like a jigsaw puzzle: pieces of clarity are identified and fitted
sets of circumstances. “The first is where a company is formed or availed of for the sole or main purpose of deferring, reducing or otherwise avoiding income tax or dividend tax, by accumulating ordinary revenue or
dividends instead of having those amounts accumulated directly by natural persons.”
The second, Desmond says, is where the tax benefit of accumulating dividends in a company outweighs the other commercial benefits of utilising a company for such purpose.
However, as the proposed approach is a subjective one it may create some uncertainty about whether a particular company is to be treated as a passive holding company. Exclusions help the definition. “Some of the exclusions are for certain types of entities, such as listed companies.”
No doubt Remgro and other large investment holding companies will breathe a sigh of relief about that.
“Others arise as a result of a company’s activities, such as having more active than passive income or distributing its passive income,” says Desmond. What’s also excluded from the passive holding company’s regime is royalties. Which probably means aspiring writers – of which there must be more than 10 just on this publication – can go out and form a company to collect the income when that book finally gets published.
Two sets of circumstances. Tim Desmond