Could a Recent TAC Decision Impact Shareholder Reinvestments?
Irish private equity deals often involve the selling shareholders reinvesting a proportion of the sale proceeds they receive back into the acquisition vehicle owned by the buyer. Whether a recent Tax Appeals Commission (TAC) decision impacts such investments remains to be seen.
Reinvestment Structures
A basic reinvestment structure or “rolling” of equity will involve the sellers disposing of a portion of their shares in exchange for new shares in the purchasing vehicle. Irish tax law provides for Capital Gains Tax (CGT) relief in such scenarios, usually without much ambiguity. The seller has exchanged their old shares for new shares, without realising their equity, so the law allows them to defer CGT on that equity.
With growing foreign investment from UK and US private equity firms, we are seeing more variety and complexity in deal structures which are not necessarily designed for the Irish market. In these more complex deals, a seller may be reinvesting, not for shares in the purchaser vehicle, but for loan notes, deferred shares, units in a partnership, depositary receipts, preference shares in a stack of holding companies, etc. While these interests may be economically similar to a normal share exchange, the structural differences often mean CGT relief is not available without some pre-sale preparation.
One way to meet this challenge and achieve a tax neutral reinvestment is for the seller to transfer their shares to a holding company pre-sale by way of a normal share-for-share exchange. The holding company will then sell to the purchaser and reinvest in loan notes, deferred shares, units, etc. Due to the way CGT rules work on a share-for-share exchange, the holding company is able to reinvest without inadvertently triggering CGT.
TAC Decision 58TACD2025
We have discussed this decision in further detail in our recent article – Tax Appeal Commission Determination (58TACD2025): Impact on Pre-Sale Structuring which we refer readers to for further context.
However, in summary, key aspects of the case are as follows:
- A shareholder transferred his shares in a trading company to a holding company by way of share-for-share exchange and claimed CGT relief. This was done shortly before the holding company sold the trading company to a third party.
- As mentioned previously, due to the way CGT rules work on a share-for-share exchange, the sale by the holding company was essentially tax neutral.
- Revenue challenged the CGT relief claim on various grounds, including on the basis that the exchange was not for bona fide commercial reasons and was motivated by avoiding tax on the sale.
- The TAC agreed that it was a tax avoidance scheme and CGT relief did not apply. In reaching this conclusion, particular emphasis was placed on the taxpayer’s knowledge of the impending sale when putting in place the holding company.
The decision does not address important UK precedents on tax avoidance in this area, where case law has distinguished clearly between tax deferral and tax avoidance (in the context of specific anti-avoidance share-for-share exchanges). One possible explanation is that the taxpayer did not raise this argument in their defence. Instead, the taxpayer relied on a singular argument – that he did not know a sale was imminent.
Implications for Reinvestment
While this case did not involve reinvestment by a selling shareholder, it scrutinised the general use of holding companies pre-sale. The TAC, in agreeing with Revenue’s arguments, considered that knowledge of an impending sale was sufficient to demonstrate a tax avoidance motive in the circumstances and deny CGT relief.
While we do not expect that knowledge of an impending sale will be detrimental in all cases, the fact that this finding was largely unqualified by the TAC means there is uncertainty generally around the use of holding companies pre-sale. This potentially brings additional risk and complexity in structuring private equity deals, which will not be welcome in the market for either buyers or sellers.
In some private equity deals, it might be possible to negotiate the purchaser’s acquisition structure to ensure that reinvestment/rolling is tax neutral without using a pre-sale holding company. But in many cases, this will not be possible, and so the sellers may be asked to roll/reinvest after paying CGT. This would mean reinvesting substantially more equity to fund a transaction, making some deals much less attractive. Whether this has any impact on Irish private equity deals in 2025 and 2026 remains to be seen.
