Ireland: Section 23 Finance Act 2017- Death Knell For Management Buy-Outs In The SME Sector?

Last Updated: 15 January 2018
Article by Mark Ludlow


Finance Act 2017, passed on Christmas Day, has inserted a new anti-avoidance provision into tax legislation which impacts all management buy-outs (MBOs) involving 'close companies'. This is an important provision as the vast majority of companies in the SME sector are 'close companies' so its impact will be extensive. The legislation, where it applies, imposes a charge to income tax on selling shareholders in certain transactions rather than allowing such shareholders obtain Capital Gains Tax treatment (which would enable the selling shareholder claim entrepreneur relief or retirement relief).

Whilst Revenue guidance appears to allow for a (non-statutory) motive test to be used to avoid the new provision, the guidance is contradictory, unclear and very ambiguous.

The fact that a MBO might be commercially motivated does not matter under the legislation and the Revenue guidance, although making reference to a 'safe harbour' in this regard, does not offer any real comfort for the vast bulk of such transactions.

The upshot is that shareholders of such companies, who are thinking of selling to existing management, will need to consider the new provisions carefully prior to agreeing to any such sale.

This measure may act as a practical bar to commercially motivated MBOs. This is unfortunate at best, particularly as it will have most impact on the SME sector, which is, and always has been, the powerhouse of the Irish economy.


This article will summarise the new provision, the perceived 'mischief' it was aimed to address, as well as the effect it will have on MBOs. This article also considers guidance issued by the Revenue in eBrief 3/18.

The Legislation: Section 135(3A) Taxes Consolidation Act 1997

In outline, the new sub-section (3A) provides:

  1. Where a shareholder in a close company,1 (or a person connected with that shareholder);
  2. enters into arrangements (a vague concept broadly encompassing any agreement, understanding, scheme, transaction or series of transactions);
  3. with a second close company;
  4. either directly or indirectly;
  5. whereby a shareholder (which it appears may not even have to be the same shareholder as at (1) above);
  6. disposes of shares or securities in the first company;
  7. and the payment for those shares is paid or to be paid;
  8. either directly or indirectly;
  9. from the assets of the first company [the target];

then any amount received for those shares from the second company [the acquirer] (or such others) shall be treated as a distribution subject to income tax.

The Mischief

The mischief which sub-section (3A) seeks to address is set out in example 3.3 of the Revenue guidance.2 That example is now set out below for ease of reference:

"Barry and Bob run a bakery and own 100% of the shares of BB Bakery Limited ('BBBL') equally. The company has built up cash reserves over the years and has retained profits of €1,400,000. Bob wishes to exit the business and have BBBL buyout his shares. However, rather than have BBBL purchase his shares directly, where the buy-back would trigger an income tax charge for Bob, Barry arranges to set up a new company ('NewCo') to purchase the shares. NewCo purchases Bob's shares for €700,000. The consideration in respect of the acquisition is left outstanding. BBBL subsequently pays a dividend of €700,000 to NewCo which NewCo uses to pay the deferred consideration to Bob.

The provisions of section 135(3A) TCA apply to treat the payment of €700,000 to Bob as a distribution made by BBBL to Bob on which Bob is subject to income tax. Barry has entered into an arrangement to secure the payment of consideration to Bob from the assets of BBBL and the assets of BBBL have been depleted by €700,000. Previously Bob may also have sought to claim retirement relief in relation to the €700,000 payment received.

It should be noted that had Barry sourced the payment from his own resources then Bob would have been subject to CGT on the disposal of his shares."

The example can be illustrated with the following diagram.


The example acknowledges that Bob may have been able to claim retirement relief on a direct sale to Barry. To claim retirement relief Bob must have owned and worked in the business for at least 10 years (but in practice this is likely to have been for a greater period of time, e.g. 20 plus years).

The 'mischief' which the new subsection (3A) is seeking to prevent in this example is to stop Bob from claiming CGT treatment and retirement relief on his exit (from a long held business) where the payment for Bob's shares has been sourced from BBBL (Barry not having the funds to pay directly himself).

This appears to be the "unfair outcome"3 which the provision seeks to challenge. The rationale for the approach is not stated in this example but is subsequently expressly stated in the later example 3.4.2, that "in contemplation of the sale ... retains profits in

[BBBL] in excess of the company's commercial needs, rather than taking a dividend.". This rationale is problematic for a number of reasons, including:

  1. If Bob was a sole shareholder, he could have simply liquidated the company, obtained CGT treatment on the proceeds returned to him, and claimed retirement relief on these. As it is, Bob is a co-shareholder with Barry. In light of (3A), Bob and Barry may alter their approach and decide to liquidate BBBL, extract the proceeds and qualify for CGT treatment and claim retirement relief. Revenue would not seem to have any qualms with that, but of course that exit would necessitate the closing of the bakery, the redundancy of its employees, and the community losing the benefit of its future productive output.4
  2. Even if Bob is not the sole shareholder, what incentive now exists for him to allow the business to continue? He will now be fully justified in saying to Barry that he wants to exit and the only exit feasible for him is for the company to be liquidated. He can then claim retirement relief or entrepreneur relief, to which he may be entitled. Whether or not liquidations will increase as a result of the measure, it would seem that unfortunately this is now a conversation which shareholders will have to have with each other.
  3. The assumption that the 'excess' cash5 should be distributed out by dividend (i.e. in the most tax costly manner possible) is also problematic. Why shouldn't Bob be able to avail of CGT treatment, and claim retirement/entrepreneur relief? After all, he is disposing of his interest in the business and thus incurring the genuine economic consequences of that disposal. In such circumstances CGT treatment is more appropriate. It should also be noted that Barry's base cost in NewCo's shares is still negligible so there is still a considerable latent tax charge for Barry on his own ultimate future exit.
  4. As Revenue note, if Barry had had sufficient personal resources to purchase Bob's shares then CGT treatment would have applied. It must be asked, why should Barry's means determine Bob's tax treatment?

Impact on Management Buy-Outs

Whatever one's views of the merits or otherwise of Barry and Bob's situation, when the proposed changes were first published it was immediately apparent that they were too broadly worded and would impact also on management buy-outs (MBO).

The following diagram illustrates a typical MBO structure, and you will note the similarity with the 'Barry and Bob' structure outlined above.

The funds used to buy-out the owner are generally initially sourced (either partially or fully) from a bank/equity house, and that that bank loan is then repaid from dividends paid up from the Target company to NewCo. However the purchase price is essentially being funded from the Target's resources as NewCo does not have any assets (other than its shares in the Target), nor any income stream (other than from the Target) and in most cases a management team will not have the sufficient personal resources to fund the purchase. In this typical scenario the new sub-section (3A) will apply (per the actual wording of the legislation).

Many of Ireland's indigenous business successes have grown from MBOs. Any measure which challenges domestic MBOs will also inhibit Irish economic growth and employment.

When the measures were published at the committee stage of the Finance Bill, representatives of the main legal, tax, and accounting bodies immediately communicated their concerns regarding the new provision to the Department of Finance and assurances were received that although the wording of draft legislation would not be altered Revenue would issue guidance6 which would clarify that genuine MBOs would not be effected.

Despite the implications for Irish business, the amendment itself was introduced with a bare minimum of discussion at the Dail committee stage on 8 November 2017.

Subsequently on 23 November 2017, at the report stage Dail debate,7 Michael McGrath T.D. (opposition Finance spokesman) tabled an amendment which would require an impact assessment to be carried out on the operation of (3A) and then queried:

"I must ask the question on behalf of those who raised the issue who claim that this will also affect bona fide commercial transactions. Has the Minister examined the impact of this proposal in that respect because a number of people put it to me that the measure will close down most forms of commercially motivated management buy-out transactions and many third party SME company purchases because of the wording adopted? It is important that the Department would deal with it. That is the essential claim that is being made by some representatives and I ask the Minister to give an assurance that it would not be the case and that the anti-avoidance measures that have been introduced by him on Committee Stage are only going to affect the type of contrived arrangements we all agree should not be allowed."

The Minister of State at the Department of Finance (Michael D'Arcy T.D.): replied that the legislation was targeted at a specific tax avoidance scheme (i.e. akin to Bob and Barry) and then stated:


[The amendment (3A)], has no impact on bona fide management buy-outs, buy-ins or third party SME company purchases. The amendment only has application where shareholders enter into arrangements to dispose of their shares and where the consideration is paid from the assets of the target company.

I am aware that many management buy-outs involve the provision of financing by the target company out of the assets of the company. However, a bona fide buy-out is not structured on the basis of a shareholder specifically arranging for the proceeds to be funded from assets of the target company. Bona fide financing arrangements entered into by the purchaser to fund the purchase of the shares are outside of the scope of the new provisions. Therefore, on the basis that the proposed amendment to section 135 does apply to bona fide management buy-out transactions, I do not propose to accept this amendment. I am advised that Revenue will be issuing comprehensive guidance once the provision has been enacted and that should meet the Deputy's concerns." [emphasis added]

Surprisingly the Minister's response went unchallenged, even though:

  1. his statement that the amendment would have "no impact on bona fide [MBOs]" has no basis considering the wording of the legislation; and
  2. he did not answer the question as to whether any impact assessment had actually been undertaken.

Revenue Guidance

There are a number of issues with the guidance:

  1. The guidance introduces a bona fide motive test. However, there is no basis for such a test in the legislation.
  2. The guidance operates in a vacuum, and does not take into account either commercial reality or Company Law. For example, paragraph 3.4 of Revenue's guidance acknowledges that MBO's require the target to facilitate funding, but then assumes that the exiting shareholder can somehow absent himself from involvement in those arrangements. It states:

"A management buy-out (MBO) involves the management team of a company purchasing the company from the existing shareholders. Typically a new company is created to acquire the shares of the company, the 'target'. Financing may generally provided to the new company by way of a mixture of equity finance i.e. from venture capitalists and debt finance i.e. bank loans. Many MBOs may also involve the provision of financial assistance by the target company to secure and repay the loans used to acquire the shares of the target.

As stated above, subsection (3A) only has application where a member enters into the relevant arrangements and does not apply to bona-fide financing arrangements entered into by a purchaser. Therefore, whereas a bona fide MBO may involve the provision of financing out of the assets of the target company, the provisions of section 135(3A) TCA will not apply unless the member has engaged in an arrangement to ensure that the consideration is met from the assets of the company. Similarly, any actions of the purchaser subsequent to the disposal, for example a bona fide refinancing using the assets of the company, are outside the scope of the provision. Therefore, in such circumstances, a bona fide MBO may involve the member being aware of the financing arrangements entered into by the purchaser to fund the buy-out and entering into an agreement to sell on the basis of such financing arrangements, however they would not be regarded as arrangements entered into by the member to secure the payment of consideration from the assets of the company. Accordingly section 135(3A) TCA does not apply in such circumstances." [emphasis added]

Banks and equity houses do not provide funds without security in place, or without knowing how their loan will be repaid. In virtually all cases repayments are made from funds sourced from the target company by way of dividend.

The target company will be required to take some action prior to completion to provide the bank with this security. The Companies Act 2014 prohibits a company from granting financial assistance in connection with the acquisition of its own shares unless a Summary Approval Procedure (SAP) is complied with.

As the SAP requires the members to pass a resolution approving the financial assistance, the exiting shareholder would have to be involved in those arrangements.8 Accordingly it is difficult to see how MBOs will not fall foul of the new provision, even with the benefit of Revenue guidance.


Sub-section (3A) is broadly worded and does not contain any form of bona fides test. There is little correlation between the wording of the legislation and the description given by the Government Ministers as to how it will operate or its impact on MBOs.

Revenue have been put in the position of legislating their own bona fide test, yet their guidance does not appear to fully factor in that the commercial reality of banks' security requirements and Company Law will invariably require the exiting member to be an active party to the financing arrangements (thus falling foul of their bona fide test).

The problem is compounded by the fact that Revenue Technical Services will not provide opinions on the bona fides of any particular transaction, so there does not appear to be any mechanism by which a shareholder could seek pre-clearance in advance of a transaction.

The only conclusions to be drawn are:

  1. All MBOs can now be impacted by the provision;
  2. It is left to Revenue to decide which transactions they view as 'bona fide' and which they do not by applying a non-statutory 'bona fide' test of their own design; and
  3. That bona fide test does not appear to have considered that bank security requirements and company law will often require the exiting member to be involved in the arrangements (to fund the acquisition from the target's resources) made by the management team.

Given the importance of MBOs to the Irish SME sector, and the significance of that sector to the Irish economy the new sub-section (3A) is of great concern. Uncertainty concerning what arrangements will be viewed as bona fide may lead to arbitrariness and similar cases being treated differently. Exiting business owners are likely to view MBOs as a less attractive exit option and begin considering alternative exit options. The only certainty is that all parties will have to be particularly careful about how they go about structuring MBOs in future.


[1] Most Irish companies are 'close' companies.

[2]Revenue's Tax and Duty Manual 06.02.05 published through eBrief 3/18 on 5 January 2018

[3] At committee stage The Minister for Finance, Pascal O'Donohoe, stated "It is unfair that some individuals are engaging in these tax avoidance structures solely to take advantage of lower tax rates. This leads to unfair outcomes and puts other taxpayers who do not engage in such avoidance arrangements at a competitive disadvantage."

[4] The fact that the BBBL has successfully amassed such 'excess' cash reserves indicates that it has been highly productive and served the needs of its community well.

[5] And who is to say that the cash is 'excess' rather than the prudent reserves of a business which has seen the ups and downs of business cycles over 10, 20 or 30 years?

[6] In itself, this approach of enacting sweeping legislation which is to be subsequently ameliorated by administrative 'guidance' leaves a lot to be desired.


[8] Indeed, the actual wording of the 135(3A) envisages 'a member' entering arrangements, and not necessarily even the exiting member.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions