Tax Advice for Irish Family Businesses Contents Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Transferring a Business into a Company How to set up the Legal Structure Shareholders Agreements Employees Carrying on a Business outside Ireland Selling all or part of a Business Surplus cash within the Company Handing on the Business Valuing a Private Company Giving it all away Tax Advice for Irish Family Businesses by Michael Gaffney of KPMG is published by the Irish Tax Institute. It is available in paperback and ebook and available from www.taxinstitute.ie and all good bookshops for 18.99 (excl P&P). This extract is reproduced with the permission of the copyright holders, the Irish Tax Institute.
Chapter 10 Giving It All Away You can skip this bit if you have no desire to give away any material amount of money. There are deeply differing views on this subject. In the United States there always has been a strong culture of business people giving away substantial amounts of money and being less inclined to assume that the business will pass to the next generation. Some of the richest Americans are strongly in favour of a very high inheritance tax for ideological reasons. However, continental Europe - for instance Germany - has a strong tradition of family businesses which often last for a number of generations. Anything that significantly interferes with this tradition would not be regarded as good. Briefly considered below is the case for giving away money before coming to some detailed questions on how exactly this is done. Philanthropy, as opposed to charity, has sometimes described as where your soul meets a business plan. It is emotional yet rational and less likely to be made based on impulse decisions. Involving family members in philanthropy, especially the next generation, can be a fantastic way to help pass on family values. It helps build an appreciation of the value of money and acts as a real training ground in decision making within a family environment. When people give in larger amounts and in a more strategic manner, there is normally a great sense of pride. Even the most successful business people don t always approach their giving in a businesslike manner however. This is where The Community Foundation can come in we bring a focus, we find great projects, we keep costs down, we have an infrastructure to piggyback on, we provide anonymity where this is preferred... and we help make greater impact. In addition we report back to our donors on the outcomes achieved from their donations - which helps inform future grant-making. We also bring donors together on bigger issues in essence we make philanthropy fun and rewarding for both the giver and the receiver. In the Ireland of today philanthropy is even more important for the social fabric of this country. Many business owners may look at philanthropy in a new light when it comes to the issue of estate planning or in the event of the sale of a family business. When passing on the family silver the questions How much is enough? and What do I want to achieve with my wealth? are tough but
pertinent questions. Including The Community Foundation in ones will for example to support arts, sports, county or other initiatives you are passionate about is increasingly relevant. Setting up a family charitable fund after a major asset sale is also a great way to put something back. Further information on giving is available at www.communityfoundation.ie Tina Roche, Chief Executive, The Community Foundation for Ireland, September 2011. If, for whatever reason, an individual or family decides to set aside money for community or charitable purposes, it is not always easy to know how exactly to do it. There are so many choices about what to do, when to do it, who does it and exactly how it is done. It is best to explain by some examples: One example is where an individual simply writes a cheque to a charitable organisation. Assuming the organisation is approved for Revenue purposes the individual will get a tax deduction. If an individual gives away assets such as quoted shares or stocks, then they do not have to pay capital gains tax on the disposal of those items. There are few examples of this, however, because where somebody does not pay capital gains tax in this situation, they give up their entitlement to an income tax deduction, which is usually more valuable. You get the occasional case of somebody who has made their fortune establishing a company, now a public company, and therefore much of their money is tied up in shares in that company. If they want to support charities, it is easier for them to give away shares, with no capital gains tax, as this is the main liquid asset that they have for example, Bill Gates giving away Microsoft shares. Similar, lower profile examples occur in Ireland. Individuals or businesses can set up their own trusts or foundations and, if these are purely for charitable purposes, they can be approved by Revenue. This can mean that any income earned by those trusts and foundations is tax free as long as there is a plan to spend the money for charitable purposes. Once an entity is approved for two years by the Revenue Commissioners, it can also qualify for an additional status so that anybody donating money to it will get the income tax deduction for donations. If you do not have the time or willingness to set up your own foundation there are
organisations such as The Community Foundation for Ireland that will do it for you and administer it for a small fee. Among the other frequent questions is whether a company is allowed to make charitable payments. The general answer is that a company can make such payments provided that it is in the company s interest. It usually can be said to be in the company s interest where the company is enhancing its reputation by contributing to its local community or other deserving causes. Another common question is whether giving money to help a particular individual - for instance an individual who has a severe personal problem or illness - could be considered to be charitable. The answer is that in the general sense this is charitable and may be a very good thing to do. However, in a technical sense it is not charitable and will not qualify for the various favourable tax treatments. This is because the strict meaning of the phrase charitable relates to activities done for the benefit of the community or a section of the community, as opposed to being for an individual person or persons. In this sense charities can encompass education, health or relief of poverty - even sport. The detail of all this is administered and very well explained by the Revenue Commissioners Charities Office in Nenagh, Co. Tipperary. Call them or look at it on the Revenue s website. Finally I would mention the concept of a foundation an endowment. This is like a charitable trust but where the money in the trust itself is never spent. Instead only the annual income from investing that money is pledged to charity. The idea here is that the foundation itself will go on forever because the core funds are never spent (and may indeed be topped up from time to time). Many of the world s biggest charities such as the Rockefeller Foundation in the US have become huge and lasted so long precisely because they are set up this way. They can never run out of money. A word of caution is that the Revenue can sometimes take the view that, as the core money in the trust itself will never be spent, the trust should not qualify for the various charitable exemptions. This is because if you take the view that all of the money in the trust must be spent for charity and if the core trust fund is not spent, then this rule is not met. It is certainly a moot point and it is not clear whether the Revenue is correct in this. However, whether tax exemptions apply or not, this can be a very good mechanism for setting up a long lasting charitable infrastructure.
It is worth mentioning the famous case of Chuck Feeney, who made and gave away billions and continues to give through the Atlantic Philanthropies organisation. A curious aspect of Chuck Feeney s career is that he made very little money for himself. In the early years much of his wealth was in his wife s name, but later he held and controlled this wealth through a charitable foundation. This was set up decades ago. He kept control of the assets with minimal outside interference using tax haven entities. What he did was well intentioned for a good cause, but these days it would be very difficult for anybody to replicate it because tax laws and anti-taxhaven rules are now a lot more restrictive. For that reason the vast bulk of charitable organisations stay within the rules prescribed by the Irish or other tax authorities. Irish Tax Institute, 2011