Tax Implications of a Loan Between Companies

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| Lisa Cosgrave

What are the company law and tax implications of a loan from CO. A & CO. B to Co. C where C is owned by the shareholders in A & B?

There are no immediate tax implications. It largely depends on whether interest will be charged. Note that we have not considered the company law implications of the loan for the purposes of this blog.

If interest is charged it will be treated as income in the hands of Co. A & B. In this case they are holding companies, so we assume that issuing loans is not in their ordinary course of business and therefore will be taxed as investment income at 25%. The close company surcharge needs to be considered where the excess investment and estate income in the client company hasn't been distributed within 18 months of the accounting year end (assuming it is above €2k)in accordance with Section 440 TCA1997.

A deduction will be permitted in Co. C where the loan is used wholly and exclusively for the purposes of the trade (where interest is charged). Note that the interest should not be above market rates.

If there is no interest charged, then this will be a deemed gift for Capital Acquisition tax purposes. Under s43 CATCA 2003, a private company as defined under s27 CATCA 2003 is “looked through” when it receives or makes a gift or inheritance. Therefore, Director A and Director B will be deemed to be receiving a gift from either other, as you cannot take a gift from yourself, even though it is effectively from and to corporate bodies. Each director is entitled to their annual small gift exemption of €3,000 from each disponer.

However, Revenue normally applies deposit interest rates for CAT purposes, so this may not be a huge issue. Alternatively, if the deposit rate of interest was charged there would be no CAT issues.

Note: that where interest is charged withholding tax at a rate of 20% will be required to be withheld on interest payments in accordance with Section 239 TCA 1997 and paid over to the revenue with the CT1. The receiving company will get a credit for the tax withheld in its CT1.

As this is a loan between companies then the close company surcharge issues under Section 438 TCA1997 regarding paying over income tax on the unpaid element of the loan have no application, as long as there is not a plan for the company to onward loan to a participator. 

Should you require additional information please don't hesitate to contact our team on 053 91 000 00 or email [email protected].

The contents of this article are meant as a guide only and are not a substitute for professional advice. The authors 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.

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About the Author

Lisa is a key member of our tax technical support team, providing advice on all tax heads in response to queries submitted. In addition, she provides support within the tax department on company/business valuations, tax planning, restructuring and exit planning solutions for a range of clients, liquidations, and company secretarial issues. She also has experience in financial reporting and audit. A Chartered Certified Accountant and Chartered Tax Advisor, Lisa trained and worked in practice for six years prior to joining OmniPro, where she gained experience in financial reporting, tax compliance across all tax heads and audit. She has experience with a range of small and medium sized businesses assisting them with their financial reporting obligations and tax compliance across all areas

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