We previously provided an overview of some of the tax implications that can arise on a debt write-off. Following this, a recent High Court decision in Arlum Limited vs The Revenue Commissioners provided a welcome judgment for taxpayers regarding the write-off of loans used for capital purposes.

Below, we have a summary of the case and why the outcome is good news for your clients.

Overview of case

This was an appeal against a determination by the Tax Appeals Commissioner (TAC) in case 103TACD2023 favouring the Revenue Commissioners. The TAC determined that a release of debt in respect of a loan was a trading receipt and subject to corporation tax because the original debt was used to purchase land and the land value had been written down which increased the company’s corporation tax losses.

Key relevant facts

• The appellant company received a loan to finance the acquisition of a site which was intended for residential development and was held as trading stock.
• The bank wrote off a significant portion of the loan.
• The appellant took a tax deduction for the write down in value of the site which increased its trading losses forward.
• The TAC determined that the write-off of the debt should be considered a trade receipt because the original loan was used for trading purposes, specifically for the purchase of the site intended for residential development, and because tax deductions had been taken - Section 87(1) applied to treat the write off as taxable income.
• This was appealed to the High Court.

The key legislation in this High Court case was:

• Section 87(1) TCA 1997 – which states that if a debt, for which a deduction was previously allowed, is released, the amount released should be treated as a trade receipt.

The key legal question for the High Court was whether the TAC’s interpretation of Section 87(1) TCA 1997 was correct, being that the debt release was a trade receipt because there was a deduction taken for the write-off the land for which the loan was obtained.

The High Court determined that the TAC’s decision was incorrect. It was determined that the legislation in Section 87(1) TCA 1997 should be read based on the normal meaning of the words. The legislation states the following:

“Where, in computing for tax purposes the profits or gains of a trade or profession, a deduction has been allowed for any debt incurred for the purposes of the trade or profession, then, if the whole or any part of that debt is thereafter released, the amount released shall be treated as a receipt of the trade or profession arising in the period in which the release is effected”.

It was held that it was clear this section applied to where the debt itself is written off as opposed to an underlying asset which was acquired using the proceeds of the debt. As there was no deduction for corporation tax taken for the original debt then the subsequent write-off should not be considered a trading receipt and taxable.

The High Court drew a distinction between the debt itself and what the debt was utilised for.

This decision is a positive result for taxpayers as the High Court has made a distinction between the original debt and what the proceeds are used for in respect to applying Section 87(1) TCA for loans which are written off. Where there is no deduction taken for the actual debt itself, then a subsequent write-off of this debt should not be deemed a taxable trading receipt. We always recommend that the tax implications of loan write-offs (whether intercompany or with third parties) are reviewed before any transaction.

If you or your clients would like some expert guidance concerning potential debt write-offs, our team is here to help. We have extensive experience in this area and can work with you in analysing the tax impact a debt write-off could have. Talk to the OmniPro Tax and Legal Team today here.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.