Close Company Surcharge in Ireland: Rates, Rules and How to Avoid It

The close company surcharge is an extra Corporation Tax charge on profits that a close company keeps instead of paying out to its shareholders. There are two versions. A 20% surcharge hits undistributed rental, interest and dividend income. A separate 15% surcharge hits half of the undistributed trading income of professional service companies. Both can be reduced or removed by paying dividends within 18 months of the end of the accounting period, so the real task is knowing which one applies to you and planning before the window closes.

TL;DR

• Most owner-managed Irish companies are close companies, so the surcharge rules probably apply to you.
• A 20% surcharge applies to undistributed estate and investment income, such as rent, interest and dividends.
• A 15% surcharge applies to one half of the undistributed trading income of close service companies, for example those providing professional services.
• Distributing income within 18 months of the end of the accounting period reduces or avoids the charge.
• The surcharge is reported on the CT1 and collected with the following period's Corporation Tax, so it is easy to miss until the bill arrives.

Table of Contents

• Are you a close company?
• Why the surcharge exists
• The two surcharges side by side
• The 20% surcharge on investment and rental income
• The 15% surcharge for service companies
• The 18-month window
• How directors can manage the surcharge
• Common mistakes
• Our perspective
• How Stratancy can help
• FAQ
• Sources

Are you a close company?

Under Section 430 of the Taxes Consolidation Act 1997, a company is close if, on a full distribution of its distributable income, more than 50 per cent would go to five or fewer participators, or to participators who are directors. In plain terms: a company run by one director-shareholder, a couple, a few founders or a family is almost certainly close.

That covers the typical contractor company, the family property company, the single-owner consultancy and the early-stage startup before outside investors come in. Being close is not a problem in itself. The surcharge only bites when income builds up inside the company.

If you are still deciding whether to trade through a company at all, our guide on sole trader versus limited company covers the wider trade-offs.

Why the surcharge exists

Revenue explains that the general 20% charge is there to discourage the accumulation of passive, non-trading profits that would otherwise face higher personal tax rates when paid out. The service company charge has a related aim: Revenue's notes for guidance describe it as a response to professional income being diverted into a company to be taxed at corporate rather than personal rates.

Understanding that purpose helps with planning. The surcharge is not a penalty for being profitable. It is a nudge to pay profits out, or to show that the company genuinely needs to keep them in a form that is not passive investment.

The two surcharges side by side

Source for the rates and scope: Revenue's surcharge guidance.

The 20% surcharge on investment and rental income

The 20% surcharge is imposed on the undistributed after-tax estate and investment income of a close company. Revenue lists rental income, interest and dividend income as examples. It applies to the excess of that income over distributions made.

Three features of the calculation matter in practice:

• Corporation Tax comes off first. The charge works on income after tax, not gross income.
• Trading companies get a 7.5% reduction. A trading company may reduce its after-tax distributable estate and investment income by 7.5%.
• A €2,000 limit applies. Per Revenue's technical guidance, there is no surcharge where the excess is €2,000 or less. The limit is reduced proportionally for periods shorter than 12 months and divided by the number of associated companies, including the company itself. Marginal relief caps the surcharge at 80% of the excess over that limit.

Capital allowances are not deductible against estate and investment income for surcharge purposes, so a property company cannot shelter this charge that way.

Worked example: investment income

Revenue publishes this calculation for a trading company with €60,000 of estate and investment income:

Notice what the example shows. Had the company paid out the full €41,625, the excess would have been nil and so would the surcharge. The calculation is taken from Revenue's published example.

The 15% surcharge for service companies

Revenue defines a service company as a close company that carries on a profession, provides professional services, or exercises an office or employment, where the principal part of its income comes from those activities. It also includes close companies that provide services or facilities to professionals, professional partnerships, office-holders or connected persons, if the principal part of their income derives from specified activities, as set out in Revenue's manual.

In practice, think of:

• IT contractors and consultants working through their own company
• Accountants, solicitors, architects, engineers and similar professionals
• Doctors, dentists and other healthcare practitioners operating through a company
• Directors who are paid through a company for an office or employment

The charge is 15% of one half of undistributed trading income. Put another way, Revenue's manual says the 15% applies to the excess of distributable estate and investment income plus 50% of distributable trading income over distributions. The estate and investment portion of that excess is charged at 20%.

Worked example: a service company (simplified)

This is our own simplified illustration, not a Revenue example. Suppose a consultancy company has €100,000 of distributable trading income after Corporation Tax, no investment income, and pays no dividends within the 18-month window.

• Half of the distributable trading income: €50,000
• Distributions: nil
• Excess: €50,000
• Surcharge at 15%: €7,500

If the company paid out €50,000 or more within the window, the excess would fall to nil and no surcharge would arise. Real calculations involve details such as exact distributable income, associated companies and any legal restriction on distributions, so have the figures run by an accountant before you rely on them.

The 18-month window

The deadline that matters is 18 months from the end of the accounting period in which the income arises. Revenue states that distributing within that time reduces or avoids the surcharge.

Here is how that works with a 31 December year end. Profits for the year ending 31 December fall into a window that runs 18 months beyond that date. The surcharge for that period is then collected as part of the Corporation Tax liability of the next accounting period, and reported on the CT1. So the charge can reach you well over a year after the profits were earned, which is why directors often discover it late.

Two practical points follow:

1. Dividends need room to be paid. A company that is legally restricted from making distributions, for example for lack of distributable reserves, must have that restriction considered when the surcharge is worked out, as Section 440 provides.
2. Filing late can leave you exposed. If the CT1 for a period is prepared late, you may be deciding on distributions after the window has already narrowed. Our overview of CT1 filing and Corporation Tax explains the timetable.

How directors can manage the surcharge

The aim is not to avoid tax by tricks. It is to make a deliberate decision about retained profits before the window closes.

Pay dividends within the window

The simplest route. A dividend taken within 18 months reduces the excess. The trade-off is personal tax on the dividend, so the decision balances the surcharge against income tax, USC and PRSI where relevant. A director who does not need the cash personally may prefer another route, which is why modelling both is worth the effort.

Separate passive income from trading income

A company that trades but also holds rental property or large cash balances can find that the passive side triggers the 20% charge. Reviewing what income sits in which company, and whether investments belong in a separate structure, is a question for an adviser before you restructure anything.

Check the associated company position

The €2,000 limit is divided among associated companies. If you control more than one company, the limit per company may be smaller than you expect.

Keep management accounts current

You cannot decide on distributions without knowing what is distributable. Regular management accounts show profit, reserves and cash through the year, so a dividend decision is made on facts rather than at the CT1 deadline.

Five checks before your year end

1. Confirm whether the company is close and whether it counts as a service company.
2. Split income into trading, rental, interest and dividend income.
3. Estimate after-tax distributable income for each category.
4. Compare it with dividends already paid or planned within the 18 months.
5. Confirm distributable reserves so the dividends are lawful.

Common mistakes

• Assuming only property companies are affected. Service companies face their own charge on trading profits.
• Forgetting the surcharge is collected a period later. It sits in the following period's Corporation Tax, so budgeting for it is easy to overlook.
• Treating all retained profit as exposed. The 20% charge targets estate and investment income, and the 15% charge covers half of trading income for service companies. An ordinary trading company retaining trading profits does not face the service company charge.
• Ignoring the short-period adjustment. A first or last accounting period under 12 months reduces the €2,000 limit proportionally.
• Paying dividends without reserves. A dividend that cannot lawfully be paid does not solve the problem.

Our perspective

The surcharge is rarely the result of bad intent. It is usually the result of bookkeeping, payroll, VAT and the annual return being treated as separate events, so nobody looks at the full picture until the CT1 is prepared. By then the 18-month window may be partly gone.

We work with owner-managed Irish companies, contractors and startups, and our view is simple: the surcharge is a planning question that should be answered during the year. That means up-to-date books, timely management accounts, and a conversation about retained profits and dividends well before the year end. When these pieces are connected, a director can see what is distributable, what the choices cost and what to do next.

Our accountants are ACCA-qualified and work on cloud platforms including Xero, QuickBooks and Sage, so the figures behind a distribution decision are live rather than months old.

— Stratancy

How Stratancy can help

If you run a limited company, our LTD packages start from 159 € per month (LTD Essential), with LTD Growth from 239 € per month and LTD Scale from 419 € per month. They bring bookkeeping, VAT, payroll and annual compliance together, so the numbers you need for a dividend decision are ready in time. If your company is a contractor or professional practice, see our pages for contractors and freelancers and healthcare and private practices. Our annual compliance service for limited companies covers the Corporation Tax return where the surcharge is reported.

FAQ

What is the close company surcharge rate in Ireland?

There are two. The rate is 20% on undistributed estate and investment income, and 15% on one half of the undistributed trading income of close service companies. Both are set out on Revenue's surcharge page.

Does the surcharge apply to professional services companies?

Yes, if the company is a close company and counts as a service company. That means it carries on a profession, provides professional services, or exercises an office or employment, and earns the principal part of its income that way. The 15% charge applies to half of its undistributed trading income.

How do I avoid the close company surcharge?

Distribute income within 18 months of the end of the accounting period in which it arises. That reduces the excess over distributions and can remove the charge entirely. Whether a dividend is the right route depends on your personal tax position and your distributable reserves, so take advice first.

Is there a minimum amount before the surcharge applies?

For the 20% surcharge, there is no charge where the excess is €2,000 or less. The limit is reduced for periods under 12 months and divided among associated companies, as explained in Revenue's technical guidance.

Where is the surcharge reported and paid?

It is reported on the CT1 Return and collected as part of the Corporation Tax liability of the subsequent accounting period. Your accountant should check it each year when preparing the return.

Sources

• Revenue: Surcharge on undistributed income
• Revenue TDM Part 13-02-05: Surcharge on certain undistributed income
• Revenue TDM Part 13-02-06: Surcharge on undistributed income of service companies
• Revenue: Part 13 TCA Notes for Guidance
• Taxes Consolidation Act 1997, Section 430
• Taxes Consolidation Act 1997, Section 440

Recommended

• How to Register a Company in Ireland: Steps, Costs and Pitfalls
• Sole Trader vs Limited Company in Ireland: Key Differences
• Corporation Tax in Ireland: CT1 Filing Deadline & Company Tax Return
• Company Formation in Ireland: Directors, Registered Office & CRO