I have a situation where shareholders have subscribed at different times, for differing amounts, as well as for different classes of shares. Not enough reserves available for the level of distribution that is wanted and so they are looking to tap into the share premium account.
The proposal is that all shareholders get the same amount per share, regardless of what they paid.
Note: A clearance will be sought.
If a company decides to repay capital to shareholders, does it have to repay to those shareholders whose share subscription created the share premium account or can it pay the money to holders who subscribed for their shares at par only?
Replies (13)
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Are you paying a distribution (dividend), doing a capital reduction or a buy back? Not entirely clear what you are trying to achieve from the question.
I think you want to know if you do a capital reduction, resulting in the share premium being reclassified to P&L reserve, if there is then any restriction on which shareholders can receive any resulting dividend?
Why would they want to reclassify to P&L reserve (assuming that we are talking about non-corporate shareholders)?
The share premuim can be used to make a payment to all shareholders. Although clearly anyone that receives more than they paid will be liable to income tax on the excess.
If you pay any shareholder more than they subscribed for the shares, then for tax purposes, the excess is a dividend.
And I think that unless you structure your capital reduction otherwise than as returning excess amounts subscribed for shares above par value, then you would have to do as johnt27 is suggesting and just reclassify the excess as distributable reserve, with the effect that any subsequent distribution out of the reserve is taxable as a dividend.
Consider put a new holding company on top. Reduce capital in the current company by reclassifying share premium as distributable reserve. Exempt distribution up to NewHoldCo who has a share premium account that is now pro-rata to the shareholders. Might not get TiS clearance though.
Maybe transfer the trade up and do a name swap later, and then dump the current company by strike off to eliminate the holding company structure. The alternative would be to liquidate the NewHoldCo after and distribute the shares in the current company, but it will be more costly and it looks more dodgy. It will also need a TiS clearance. No need to have any current plans about how to tear it down just yet though.
TiS clearance would almost certainly not be given. And in light of recent discussions, s138 clearance may be equally hard to obtain.
"Recent discussions"? Are you talking about what seems to be HMRC's current practice of buying themselves an extra 30+ days by raising questions on commerciality?
Yep. I'm not saying that one wouldn't eventually succeed, but I'd be interested to know what the commercial purpose could be in this case. (Yes, I know, it is usually possible to fabricate something to support the application but it's not jumping out of the page at me here.)
This sounds very much like a no commercial reason transaction, or where the main purpose is to avoid tax. GAAR, anyone?