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Originally Posted by gasman
Question about Capital Gains Tax inside of Holding Companies. If shares of a related Active Operating company are sold at a capital gain, is the taxable portion of the capital gain taxed at the general rate of 23% or at the investment income rate of 46.67%. In this case Holdco is related, but not the sole owner of the Opco.
I think I know the answer, but I'm hoping the businesses being related allows for the general rate vs the investment rate.
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I will let Locke validate this one as its been a decade since I wrote the UFE but my understanding is that when the holding company sells shares of a related active operating company at a capital gain, the taxable portion (50% of the capital gain) is treated as passive investment income. The taxable portion of the capital gain (50%) is taxed at the investment income rate of 46.67%, not the general corporate tax rate of 23%. However, part of this tax is refundable when dividends are paid out of the company.
One last consideration would be if the holding company has over 10% of the operating company, it might qualify for the Capital Dividend Account, which would allow the non-taxable portion (50%) of the capital gain to be shielded and distributed tax-free in the future.