Introduction

The valuation of private companies for tax purposes holds significant importance within the Irish tax system. It plays a crucial role in accurately assessing the tax liability of shareholders in many different circumstances. Valuations undertaken for tax purposes must be guided by the relevant legislation for each tax head and often the valuation adopted for one tax head (e.g. CGT) may be different to the valuation adopted for second tax head (e.g. stamp duty). Where shares in a company are valued incorrectly, Revenue may impose penalties and interest on any under declared tax liabilities.

Capital Gains Tax (CGT)

The relevant legislation for determining the valuation of shares for Irish CGT purposes is section 548 TCA 1997. Shares are to be valued at “market value” which means the price those shares may reasonably be expected to fetch on a sale in the open market. In valuing those shares no reduction in value is to be made on the assumption that selling all of the shares at the one time would result in a lower price being fetched. Where the shares to be valued are not quoted on a stock exchange at the time at which their market value is to be determined it is to be assumed that there is available to any prospective purchaser of the shares all of the information which a prudent purchaser of those shares might reasonably require if such purchaser was proposing to purchase the shares from a willing vendor by private treaty at an arms length.

Capital Acquisitions Tax (CAT)

The relevant legislation for valuing shares for CAT purposes is section 26 CATCA 2003. Shares are to be valued at “market value” which is to be taken to be the price which such shares would fetch if sold in the open market on the date on which the share is to be valued in such manner and subject to such conditions as might reasonably be calculated to obtain for the vendor the best price for the shares. As with valuation for CGT purposes, no reduction in value is to be taken for any assumed decrease in value if all of the shares were sold at the same time, also any prospective purchaser is assumed to have all of the relevant information available to them pertaining to the shares and the company. However, section 27 CATCA 2003 contains specific provisions in relation to the valuation of shares in private companies for CAT purposes which will often create significant divergence between the valuation adopted for CAT and for other taxes. Broadly speaking, section 27 prevents the application of minority discounting to any group of shares that is under family control.

Stamp Duty

The relevant legislation for valuing shares for stamp duty purposes is contained in section 19 SDCA 1999. Shares for stamp duty purposes are valued in the same fashion that they are valued for CAT purposes, however the provisions of section 27 CATCA 2003 do not apply to determine the value of shares for the purposes of stamp duty (i.e. minority discounting does apply for stamp duty purposes).

Conclusion

By recognizing the significance of company valuation, shareholders of private companies in Ireland can effectively manage their tax obligations. Circulo have significant experience in valuing shares in private companies for all tax purposes. For further information please contact mark@circulo.ie or amanda@circulo.ie.