It is common for companies to have loans outstanding to a related company or to another company within a group structure. A situation often arises where such loans are written off without prior consideration of the potential tax implications of such a write-off. Without proper planning, such write-offs can result in unintended tax consequences for the parties involved.
In general, the tax treatment of a company’s transactions follows the accounting treatment. However – there are exceptions where the tax legislation allows or otherwise requires adjustments to be made when assessing the profits of a company which are subject to corporation tax.
For example, whilst differences in accounting treatment can apply depending on the circumstances, in general where a company has on its balance sheet as a creditor an intercompany balance, and this balance is subsequently forgiven this results in a credit journal entry on the income statement. The question that often arises in this situation is whether that receipt item in a company’s profit and loss is a taxable receipt.
Recent Tax Appeals determinations have highlighted that significant evidence must be shown which demonstrates why the accounting treatment does not apply in respect of a particular transaction. In particular, the taxpayer must clearly demonstrate that the receipt does not form any part of the trade or activities of the company and therefore be deemed a revenue receipt for tax purposes.
Overall, the tax treatment of a loan write-off will largely depend on the original purposes of the loan. The following is a guide to the likely tax implications of a loan write-off, however, it must be noted that each loan must be considered on a case-by-case basis:
- Section 87 TCA 1997 provides that the write-off of a trading balance should give rise to a taxable trading receipt for the borrower.
- The write-off of any balances which are capital in nature should not be subject to corporation tax in the hands of the borrower as it is the release of a liability.
- Where a loan is forgiven which was used by the borrower for the purchase of a capital asset, specific provisions may apply depending on the timing of the disposal of the asset which was acquired from the proceeds of the loan.
- Where the loan was used for working capital purposes and not wholly and exclusively for the purposes of the trade, there is some debate over whether it should/should not give rise to a taxable trading receipt. Interest on the loan may be taxable but the principal loan itself may fall outside the remit of Section 87 TCA 1997.
Recent Tax Appeals Cases have highlighted the complexity of arguing that a particular source of income is not trade-related but is in fact a non-taxable receipt which is not subject to corporation tax.
In addition to the above, often in group tidy ups loans are transferred between entities without full consideration of the tax implications of such a transfer. For example, before transferring any intercompany loan the stamp duty implications of this transfer should be assessed as whilst a charge to stamp duty can arise on certain loan transfers – it is possible with proper planning to avoid the charge arising.
Due to the complexities highlighted above, we would always recommend that tax advice is sought prior to tidying up any intercompany loan arrangements. If you or your clients have any questions or need assistance with reviewing intercompany loan balances please do not hesitate to contact us.
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.
