Close Company Surcharge in Ireland: What It Is and How to Avoid It
Most Irish owner-managed companies are close companies. What the 20% and 15% surcharges hit, the 18-month dividend window, and how to plan around them.
- Author
- Abbey Blue Formations
- Published
- Reading time
- 6 min read
If you own and run your own company, it is almost certainly a close company. That brings an extra tax most founders only hear about at year end: the close company surcharge.
The surcharge hits certain profits that stay in the company instead of being paid out to the owners. This guide explains who it applies to, the two rates, two worked examples, and the practical steps to keep it to a minimum.
What is a close company?
The answer to what is a close company Ireland is straightforward: it is an Irish resident company controlled by five or fewer participators, or by participators who are directors. Most owner-managed limited companies fall into this group.
The answer to what is a participator in a close company is broad. Revenue defines a participator as anyone with a share or interest in the company's capital or income. That covers shareholders and anyone with voting rights, but also loan creditors (other than banks), anyone entitled to distributions, and anyone who can use the company's assets or income. The holdings of "associates" such as a spouse, civil partner, sibling, parent or child are added together when control is tested.
Some companies are excluded. These include non-resident companies, building societies, certain quoted companies where the public holds 35% or more of the voting power, and companies controlled by companies that are not themselves close.
What is the close company surcharge?
Irish companies pay corporation tax at 12.5% on trading profits and 25% on most investment and rental income. Owners pay income tax, USC and PRSI when they take money out. Without a surcharge, owners could leave investment income in the company at the lower rate and never pay personal tax on it.
The close company surcharge is an extra charge on certain undistributed income. It encourages close companies to pay that income out to shareholders, where tax on dividends in Ireland is then due at personal rates.
The two surcharges and their rates
20% on undistributed investment and rental income
A close company pays a 20% surcharge on its undistributed after-tax estate and investment income. That includes rental income, deposit interest and dividends received.
Two reliefs reduce the bill:
- Trading company reduction. A trading company can reduce its after-tax distributable estate and investment income by 7.5% before the surcharge is worked out.
- €2,000 de minimis. There is no surcharge if the excess of distributable estate and investment income over distributions is €2,000 or less.
15% on half of undistributed professional services income
Close "service" companies pay a surcharge of 15% on one half of their undistributed trading income. Service companies include those whose business is a profession, or providing professional services, such as many consultancies and contractor companies. Their investment income is still subject to the 20% surcharge.
Worked examples
These examples are simplified; your accountant will make adjustments to distributable income.
Example 1: trading company with rental income. A shop company also owns a flat it lets out. After corporation tax, its distributable rental income for the year is €20,000, and it pays no dividends within 18 months of the year end.
- 7.5% trading company reduction: €20,000 − €1,500 = €18,500
- Surcharge at 20%: €18,500 × 20% = €3,700
Example 2: IT contractor's service company. A one-person consultancy keeps €60,000 of after-tax distributable income in the company and pays no dividend within 18 months.
- Half of undistributed income: €30,000
- Surcharge at 15%: €30,000 × 15% = €4,500
In both cases, a dividend paid within the 18-month window would have reduced or removed the surcharge.
How to avoid or reduce the close company surcharge
The surcharge is reduced if the income is distributed within 18 months of the end of the accounting period in which it arose. That window is your main planning tool. Here is how to avoid close company surcharge in practice:
- Pay a dividend in time. Dividends paid within 18 months reduce the undistributed income. Weigh the personal dividend tax Ireland charges against the surcharge you save. Our guide to paying yourself from a limited company compares the options.
- Use the joint election. Where two close companies pay dividends to each other, they can jointly elect to ignore that distribution when the surcharge is calculated. Both must include the election on their CT return.
- Consider pension contributions. Company contributions to a director's pension reduce company profits and so the income left undistributed. Take advice on the limits first.
- Get accurate year-end accounts. You can't plan a dividend without knowing your distributable income. Up-to-date bookkeeping packages make the 18-month decision far easier.
For contractors, the professional services surcharge is one of the factors to weigh when choosing a structure. See our guides to the contractor limited company and sole trader vs limited company.
How the surcharge is reported and paid
The surcharge is reported on the CT1 return. It is collected as part of the corporation tax liability of the following accounting period, not the period the income arose in. That gap is why the 18-month window works: the company has time to see its final figures and decide on a dividend. Our CT1 corporation tax deadlines post shows when those returns fall due.
Frequently Asked Questions
What is a close company in Ireland?
The answer to what is a close company Ireland owners ask is an Irish resident company controlled by five or fewer participators, or by participators who are directors. Most owner-managed limited companies qualify. Exclusions include non-resident companies and certain quoted companies.
What is a participator in a close company?
On what is a participator in a close company: anyone with a share or interest in the company's capital or income. That includes shareholders, people with voting rights, non-bank loan creditors, anyone entitled to distributions, and anyone who can use the company's assets or income. Holdings of associates, such as close relatives, are counted together when testing who controls the company.
How do I avoid the close company surcharge?
Here is how to avoid close company surcharge: pay out enough of the relevant income as dividends within 18 months of the end of the accounting period. Use the joint election where two close companies pay each other dividends, and consider pension contributions. Weigh the close company surcharge against the personal tax on dividends in Ireland before you decide, as paying out isn't always cheaper.
Does the surcharge apply to trading income?
For most companies, no. The 20% surcharge applies to undistributed estate and investment income, such as rent, interest and dividends received. The exception is close service companies, which pay 15% on one half of their undistributed trading income from professional services, as well as the 20% surcharge on any investment income.
Is my one-person consultancy a professional services company?
It may be. Companies providing professional services, such as consultancy, IT contracting, accountancy, engineering or similar work, are often treated as service companies. If so, half of undistributed trading income faces a 15% surcharge. Get advice on your own activities before the year end.
Plan your dividends before the deadline
The surcharge and dividend tax Ireland planning are easier when you know your numbers early. Our bookkeeping team keeps your accounts current and flags distributable income well before the 18-month window closes. If you're setting up a new company, click here to see what your company would cost to set up.