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Purchase of own shares: What could possibly go wrong?

By Mark McLaughlin, January 2021

Mark McLaughlin highlights a case in which the tax treatment of a company purchase of own shares was not as the taxpayer had hoped.  

A company purchase of own shares (CPOS) is often a tax-efficient way for an individual shareholder to dispose of their shares (e.g. on retirement).  

However, unexpected tax consequences can arise if a CPOS is not handled correctly.    

Income treatment 

As a general rule, when the company buys back its own shares from the shareholder, any ‘premium’ (i.e. payment in excess of the capital originally subscribed for the shares) constitutes a distribution of income (i.e. similar to a dividend).  

If the proceeds are treated as an income distribution, it will probably be subject to tax at rates of 32.5% and/or 38.1%. 

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