We here at Book Smart Accountancy know that many Irish company owners are surprised to discover that keeping profits inside their company can sometimes lead to an extra tax charge. The close company surcharge is one of the less familiar areas of Irish tax, yet it affects a large number of owner-managed businesses, particularly those earning rental or investment income or providing professional services. With the year end approaching, now is the ideal time to understand whether the surcharge could apply to your company and what you can do to manage it.
What Is a Close Company?
A close company is broadly one that is controlled by five or fewer shareholders, or by shareholders who are also directors, regardless of how many there are. In practice, this captures the vast majority of family businesses and owner-managed companies in Ireland.
Because the people who control a close company can decide whether profits are paid out or kept in the business, special rules exist to prevent companies from being used to shelter income from higher personal tax rates. The surcharge is one of the most important of these rules.
What Is the Close Company Surcharge?
The surcharge is an additional corporation tax charge on certain types of income that a close company retains rather than distributes to its shareholders. It most commonly applies to investment income, such as deposit interest, and estate income, such as rent from property.
In general, a surcharge of 20% applies to undistributed investment and estate income, after certain deductions. When combined with the corporation tax already payable on that income, the overall tax cost of retaining it in the company can be considerably higher than many owners expect. A small de minimis threshold applies, so companies with very modest amounts of undistributed passive income may not be affected.
Rental Income Held in a Company
Holding investment property through a company is common in Ireland, and it is one of the areas where the surcharge often arises. Rental income in a company is generally taxed at the higher corporation tax rate for passive income, and if the profits are retained rather than distributed, the surcharge can apply on top.
Many owners use rental profits to repay borrowings on the property, assuming this is a sensible use of retained funds. While it may make commercial sense, it does not automatically remove the surcharge, so the overall tax position should be reviewed carefully. Whether property is better held personally or in a company depends on your circumstances and should be revisited from time to time.
Professional Service Companies
Companies providing certain professional services, such as medical, dental, legal, architectural, engineering and accountancy services, face an additional consideration. As well as the surcharge on investment and estate income, an extra surcharge can apply to a portion of their undistributed professional or trading income.
This means that service companies retaining significant profits year after year may face a higher tax cost than trading companies in other sectors. Owners of these businesses should pay particular attention to how much profit is retained and why.
How Distributions Can Reduce the Surcharge
The surcharge can be reduced or eliminated by paying dividends to shareholders. Importantly, a company generally has 18 months from the end of its accounting period to make these distributions. For a company with a 31 December 2026 year end, this provides time to plan rather than forcing a rushed decision.
However, paying dividends has its own tax consequences. Dividend withholding tax applies when dividends are paid, and shareholders are taxed on dividends at their marginal rates of income tax, along with USC and PRSI. The goal is to compare the cost of the surcharge with the personal tax cost of a distribution and choose the most efficient option.
Five Checks Before Year End
First, confirm whether your company is a close company and identify the types of income it earns, distinguishing trading income from investment, rental and professional service income.
Second, estimate how much passive income the company is likely to retain for the year and whether it exceeds the de minimis threshold.
Third, if your company provides professional services, review the level of profits being retained and whether the additional surcharge could apply.
Fourth, plan the timing and amount of any dividends, taking into account the 18-month window and the personal tax position of each shareholder.
Fifth, consider alternatives. Company pension contributions for directors can be a tax-efficient way to extract value, reinvesting in the trade can change the profile of retained profits and, in some cases, reviewing the structure of the business or how investments are held may produce a better long-term outcome.
Other Close Company Rules to Watch
The surcharge is not the only rule that applies to close companies. Loans to directors and shareholders, benefits provided to participators and certain expenses can also have tax consequences. Year end is a good time to review director’s loan account balances and any personal expenses paid by the company.
Plan Ahead and Avoid Surprises
The close company surcharge can add an unexpected cost to retained profits, but with careful planning it can often be managed or avoided. Reviewing your company’s income, retained profits and distribution strategy before year end gives you time to make informed decisions.
At Book Smart Accountancy, we help company owners understand how the close company rules apply to them and plan the most tax-efficient approach to retaining and extracting profits.
If you would like to discuss your business, contact us on or email michelle@jmcqaccountants.ie or visit booksmartaccountancy.ie.
Disclaimer: This article is based on publicly available information and is intended for general guidance only. While every effort has been made to ensure accuracy at the time of publication, details may change and errors may occur. This content does not constitute financial, legal or professional advice. Readers should seek appropriate professional guidance before making decisions. Neither the publisher nor the authors accept liability for any loss arising from reliance on this material.
