Company Directors & Wealth Extraction

Company Directors

We define a proprietary Director as an individual who is a director of a small trading company, controls more than 20% of the voting rights and is in receipt of Schedule E remuneration from the company. There are several obvious differences between a sole-trader type ownership structure and a limited corporation. These relate primarily to the nature of the liabilities, taxable remuneration and flexibility. The last point is critical to understand in the context of wealth extraction. Proprietary directors have the flexibility to influence both the amount of taxable remuneration and retained profits available in the company to enable wealth extraction strategies. Discussing optimal wealth management strategy without the tax implications is like reviewing the weather without any charts. A coherent Tax plan is key. There are many ways to skin the proverbial cat of adequate retirement provision. We can increase the company value [at the point of retirement] in readiness for sale by de-leveraging and paying down company debt. Company directors may increase salaries and make greater “after-tax” income through personal investments, EIIS schemes and/ or reduce personal debts. None of the above factor in the tax advantages available through pension provision.

Important Tax Features

• Director is not entitled to the PAYE income tax credit in respect of Schedule E remuneration if they own and/or control [directly or indirectly] > 15% of the company shares.
• Directors are entitled to the Earned income tax credit of 20% of such income, to a maximum of €1,500
• Company Directors are classified as self-employed for PRSI purposes if they own more than 50% of the company shares and therefore pay Class S PRSI
• A spouse/ civil partner of a proprietary director who is employed by the company is not entitled to claim the PAYE tax credit of up to €1,650 for income tax purposes*

* They are entitled to the earned income tax credit of 20% of such income

Wealth Extraction

A prudent succession planning strategy is intrinsically linked to wealth extraction. As proprietary directors approach their retirement, some common questions emerge relating to exiting the business, sale of shares and the consideration received. The company may establish an employer sponsored occupational pension scheme for individuals working in the business in respect of their Schedule E remuneration from the company. There are several key strategic advantages to taking this option including but not limited to:

• Strategic reduction of potential CGT/CAT liabilities
• Independent fund created removed from the commercial fortunes of the business
• Retirement fund created to facilitate the smooth transition out of the business

Important considerations:

1. What are the implications on reducing salary & bonuses to make room for a company pension contribution?
2. What are the implications on the maximum funding calculation available?
3. Is sufficient “Final remuneration” available to enable the reduce salary approach?
4. Are you aware of the full implications of salary sacrifice?

There are several tax advantages for a company setting up an occupational pension scheme including:

• The Employer contribution is not a BIK for income tax purposes
• The company contribution is exempt from income tax, PRSI and USC
• Unlike personal contributions [to say a PRSA or Personal Pension], age-related limits for tax-relief do not exist
• There is significant scope available to fund for past service [through a Special contribution]
• Benefits accessible from age 50 subject to strict conditions relating to early retirement
• Potential for larger tax-free lump sum through salary & service route
• Much higher levels of tax-deductible contributions can be made

Company pension funding is complex, and this short piece cannot capture the many planning options available. Notable mentions must include (i) optimal options if the Proprietary director has an income tax liability in the previous year, (ii) death in service issues relating to 4 x times Salary cap, (iii) funding limits and (iv) calculation of final remuneration (v) preservation of retirement capital