The Close Company Surcharge Explained: Why Your Irish Company Could Pay Extra Tax on Rental, Investment and Professional Income

The close company surcharge is the corporation tax charge most likely to appear on a Revenue query and least likely to have been explained to the company owner. It applies to almost every Irish owner-managed company that earns rent or interest, and a second version applies to companies providing professional services. Both are easy to avoid once you know they exist, and expensive to ignore.

This guide explains what a close company is, how each surcharge is calculated, with two worked examples based on Revenue's own manuals, and how a dividend paid within 18 months removes the charge.

What a close company is

A close company is an Irish-resident company that is controlled by five or fewer participators, or by participators who are also directors. A participator is broadly anyone with a share or interest in the company's capital or income. Nearly every family company, every company owned by one or two founders, and every contractor or consultant company is a close company. Quoted companies and their subsidiaries are generally outside the definition.

If your company is close, three extra sets of rules apply: the surcharge on undistributed rental and investment income, the surcharge on undistributed professional income, and the charge on loans to participators. The loan charge is covered in our guide to paying yourself from a limited company.

Why the surcharge exists

Without it, a company owner could park passive investments inside a company, pay corporation tax at 25% on the rent and interest, and leave the money there indefinitely rather than drawing it as a dividend and paying income tax at up to 52%. The surcharge is designed to remove the advantage of accumulating passive income in a company. The professional service company version has the same aim for one-person professional companies, where the trading income would otherwise be taxed at 12.5% instead of at the professional's personal rate.

Surcharge one: 20% on undistributed rental and investment income

Section 440 imposes a surcharge of 20% on the excess of a close company's distributable estate and investment income over the distributions it makes for the accounting period.

Estate income means rent and other income from land and buildings. Investment income means interest, dividends and other income that would not be earned income in an individual's hands. Trading income is not included, and chargeable gains are not included.

The calculation, following Revenue's manual, runs:

1. Identify the company's rental and investment income for the period.
2. Deduct the corporation tax on that income, normally at 25%. Dividends received from Irish companies carry no corporation tax and are included in full.
3. If the company is a trading company, meaning it exists wholly or mainly to carry on a trade, reduce the result by a further 7.5%.
4. The figure left is the distributable estate and investment income.
5. Deduct the distributions made for the period, including dividends paid within 18 months of the period end.
6. Apply 20% to whatever remains.

Worked example: trading company with some rent and interest

A trading company has trading income of €32,000, rental income of €6,000 and bank interest of €8,000 in the year to 31 December 2025. It pays a dividend of €2,000 for the year on 1 February 2026.

The rental and investment income is €14,000. Corporation tax at 25% is €3,500, leaving €10,500. Because the company is a trading company, that figure is reduced by 7.5%, or about €790, to roughly €9,710. The €2,000 dividend is deducted, leaving about €7,710. The surcharge is 20% of that, or roughly €1,540.

Revenue's own worked example in the manual, which includes some additional adjustments for trading charges and a deemed distribution, arrives at a surcharge of €1,706 on very similar facts. The point is the same: a trading company with a modest amount of rent and deposit interest will have a surcharge unless it pays a dividend.

Surcharge two: professional service companies

Section 441 adds a second surcharge for service companies. A service company is a close company whose income comes mainly from carrying on a profession, providing professional services, or holding an office or employment, or from providing services or facilities to such businesses or to the people connected with them.

Revenue's manual lists the activities it regards as professions for this purpose. The list includes accountants, actors, actuaries, architects, auctioneers and estate agents, barristers, computer programmers, dentists, doctors, engineers, journalists, opticians, quantity surveyors, solicitors and veterinary surgeons. It is not exhaustive. The manual says advertising agents, insurance brokers, retail pharmacies, management consultants, public relations companies and stockbrokers are generally not professions. Companies supplying medical locums to unconnected parties are treated as providing staff rather than professional services.

For a service company, the surcharge is 15% on the amount by which the sum of the distributable estate and investment income and 50% of the distributable trading income exceeds the distributions for the period. Where part of the excess relates to estate and investment income, that part bears 20% rather than 15%.

Worked example: one-person consultancy

A close company run by an engineer has distributable trading income of €10,000, distributable investment income of €3,000 and distributable estate income of €4,000, and pays a dividend of €6,000 for the year.

Half the trading income is €5,000. Adding the €7,000 of investment and estate income gives €12,000. Deducting the €6,000 dividend leaves €6,000 subject to surcharge. The estate and investment income of €7,000 exceeds the dividend by €1,000, so that €1,000 is surcharged at 20%, or €200, and the remaining €5,000 at 15%, or €750. The total surcharge is €950. This is Revenue's own example from the manual.

The important feature is that half of the undistributed trading income of a professional company is surcharged, not just its passive income. For a contractor or consultant retaining profits in the company, that is an additional charge on top of the 12.5% corporation tax already paid, unless enough is paid out as salary or dividend.

The 18-month window

Distributions for an accounting period include dividends declared for that period and paid within 18 months after the period ends. A company with a 31 December 2025 year end therefore has until 30 June 2027 to pay a dividend that counts against the 2025 surcharge.

This is the main planning tool. Once the accounts for the year are finalised and the distributable income is known, the company can decide whether to pay a dividend to clear the surcharge or to accept the surcharge and keep the money in the company. A dividend bears dividend withholding tax and is taxable in the shareholder's hands, so paying one is not automatically the right answer. For a shareholder already on the 40% rate, the surcharge is often cheaper than the dividend, and the choice should be made on the numbers each year rather than by default.

The €2,000 de minimis and marginal relief

There is no surcharge where the excess of distributable income over distributions is €2,000 or less. Marginal relief applies just above that: the surcharge cannot exceed 80% of the amount by which the excess is greater than €2,000, which means the relief runs out at an excess of €2,666 for the 20% surcharge and €2,461 for the 15% surcharge. The €2,000 limit is shared between associated companies and is reduced in proportion for a short accounting period.

How the surcharge is paid

The surcharge is treated as corporation tax of the accounting period following the one in which the income arose. The surcharge on 2025 income, if no dividend is paid by 30 June 2027, is included in the 2026 corporation tax liability and reported on the 2026 CT1. It also counts towards the €200,000 threshold that decides whether a company is a small or large company for preliminary tax purposes.

A CT1 that omits a surcharge that is due is an incomplete return, which can lead to interest and a surcharge for failing to make a correct return in addition to the tax itself.

What does not reduce the surcharge

Several things that reduce corporation tax do not reduce the surcharge computation. Capital allowances are not deductible against estate and investment income for surcharge purposes. Trading losses carried forward or back are ignored in computing the company's income for the surcharge, although a current-year trading loss is deducted. Transfers to reserves or bonus issues that artificially reduce the accumulated undistributed income are disregarded. The surcharge is also limited to the actual accumulated undistributed income at the end of the period, so a company that has genuinely spent its passive income on the trade will not be surcharged on income it no longer holds.

Legitimate planning points

• Pay a dividend within 18 months where the shareholder's personal tax on it is lower than the surcharge plus the eventual tax on extraction.
• Pay salary or an employer pension contribution. These reduce trading income and therefore the professional service surcharge, and a pension contribution is not taxable in the director's hands.
• Keep passive investments out of the trading company. Rent and interest earned personally bear income tax once, with no surcharge.
• Where a holding company receives dividends from an Irish subsidiary, consider the joint election that allows the dividend to be disregarded for surcharge purposes, which Revenue's manual describes.
• Check the service company definition carefully. Bookkeeping and payroll income is not professional income even in an accountancy company, and Revenue looks at the income on a client-by-client basis.

Artificial arrangements to avoid the surcharge, such as paying a dividend and lending it straight back, are caught by the loan to participator rules and by the anti-avoidance provisions.

Getting help with your CT1 and corporation tax

We calculate the close company surcharge as part of every CT1 we prepare, model whether a dividend within the 18-month window is worth paying, and review earlier returns where the surcharge panels were left blank. Contact us today if you need help with CT filings, or get in touch here and we will get back to you.

Sources

The rules and examples in this guide are from Tax and Duty Manual Part 13-02-05, Surcharge on Certain Undistributed Income of Close Companies; Part 13-02-06, Surcharge on Undistributed Income of Service Companies; Part 13-02-03, Loans to Participators; and Part 41A-07-02, Payment of Preliminary Corporation Tax. Information provided courtesy of the Revenue Commissioners under a Creative Commons Attribution 4.0 International (CC BY 4.0) licence.