Revenue Note for Guidance

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Revenue Note for Guidance

Schedule 18A

[Section 626A]

Restriction on Set-off of Pre-entry Losses

Overview

This Schedule is an anti-avoidance provision, the purpose of which is to curb an abuse whereby companies with unused capital losses could be bought by other companies to use these losses to shelter gains from tax liability. The Schedule restricts the extent to which these “pre-entry losses” of a company can be used to shelter gains accruing to a company or a group of companies after the company with an unused loss has joined the group.

The term “pre-entry losses” refers to losses accruing to the company before entry to the group as well as losses on the sale of assets brought in. While the provision ensures that these losses cannot be used subsequently by a group which had no previous commercial connection with the company when those losses accrued, that company will be allowed to use those losses itself in the same way that it could have had it never entered the group.

Details

The Schedule comprises 5 paragraphs and makes provision in relation to losses accruing to a company before the time it becomes a member of a group and losses accruing on a subsequent disposal of assets held by the company at that time.

Application and construction of Schedule

par 1(1) The Schedule applies to a group of companies and refers to this as “the relevant group”.

par 1(2) A “pre-entry loss” is defined as —

  • an allowable loss accruing to a company before it joined the relevant group and which has not been previously allowed against gains accruing to the company, or
  • the pre-entry proportion of an allowable loss accruing on the disposal of a “pre-entry asset”. This pre-entry proportion is calculated in accordance with paragraph 2 of the Schedule.

par 1(3) A “pre-entry asset” is defined as an asset held by a company before the occurrence of a “relevant event”. The term “relevant event” is defined in subparagraph (3A).

A “relevant event” means the following:

par1(3A) (a)(i) Where a company was within the charge to Irish tax in respect of the asset concerned at the time it became a member of the group, the relevant event is the company becoming a member of the group.

  • Where an asset is transferred to an SE or SCE in the course of its formation by a merger then —
    • generally the relevant event will be the asset becoming a chargeable asset in relation to the SE or the SCE, or
    • par1(3A) (a)(ia) if, when the SE or SCE is formed, the asset was a chargeable asset of a company that cease to exist in the formation of the SE or SCE, the relevant event will be the time at which the asset becomes a chargeable asset of that company
  • par 1(3A) (a)(ii) Where the company was not within the charge to Irish tax at the time it became a member of the group, the relevant event is the time at which the company comes within the charge to Irish tax in respect of the asset concerned. A company may be within the charge to Irish tax in respect of an asset either by being resident in the State or by virtue of the fact that the asset was a “chargeable asset” in relation to the company.

par 1(3A)(b) An asset is regarded as a “chargeable asset” in relation to a company at any time if, were the asset to be disposed of by the company at that time or, if the company is an SE or an SCE, by reason of the asset having been transferred to the SE or the SCE on its formation, any gain accruing would be a chargeable gain.

par 1(4) An exception is made to the definition of “pre-entry asset” in subparagraph (3) where an asset is brought into a group by a company, sold to a third party and subsequently reacquired by the group. If any interest in the asset is retained, however, that interest is a “pre-entry asset”.

par 1(5) The “relevant time” is defined as the time the company enters the group or the last such time if it has entered on more than one occasion. In addition the asset is a “pre-entry asset” if it would be a “pre-entry asset” in respect of any occasion the company joined the group. This is necessary to prevent manipulation of group entry to turn a “pre-entry asset” into one which is not.

par 1(6) Provision is made for an effective “look through” principle where the principal company of a group joins another group and the two groups are treated as the same group by virtue of of subsections (3) or (3A) of section 616 and the second group together with the first group is, as a result of this, also the relevant group. In this situation the companies in the first group will be treated for the purposes of this Schedule as having joined the second group at the time the principal company of the first group joined the second group. Subsections (3) or (3A) of section 616 would otherwise have deemed this joining to have taken place when the companies joined the first group.

par 1(7) Provision is made for an exception to the rule contained in subparagraph (6). This exception applies where the owners of the second group are the same as the owners of the first group and the principal company of the second group was not a principal company of any previous group and now simply holds all or most of the issued share capital of the company which was the principal company of the first group. This situation might apply where a new holding company is set up to be the principal company for the existing group. In such circumstances the “relevant time” is the time the companies joined the first group.

par 1(8) Two assets will be treated as the same asset if the value of one is derived from the other (such as a freehold derived from a leasehold). If the first asset is a “pre-entry asset” in these circumstances then the second asset is also.

par 1(9) Provision is made for the special situation of the annual deemed disposal of assets held by the life fund of life assurance companies (section 719) and undertakings for collective investment (section 738(4)(a)). The 7 year spreading provisions in sections 720 and 738(4)(b), respectively, are ignored.

Calculation of pre-entry loss by reference to market value

par 2(1) The pre-entry loss on such a disposal is the smaller of the amounts determined by subparagraph (2).

par 2(2) These amounts are calculated as follows —

  • the amount of the loss which would have accrued if the asset had been disposed of at the time of group entry by the company, or
  • the loss accrued on the actual disposal.

Gains from which pre-entry losses are to be deductible

Pre-entry losses are losses which actually accrued to the company before it joined the group.

par 3(1) These losses can be set against gains —

  • on assets disposed of by the company before it joined the group,
  • on assets disposed of after entry but which were held by the company before entry, and
  • on the disposal of assets, acquired by the company on or after entry from a 3rd party and which have been used continuously by the company for the purposes of a trade which the company has continued to engage in since before entry into the group.

par 3(2) The pre-entry proportion of an allowable loss on a pre-entry asset, i.e. assets brought into the group by the company on entry, can be set against gains as set out in subparagraph (1).

par 3(3) Provision is made for the situation where 2 or more companies, which were group companies, together join a new group. For the purposes of setting pre-entry losses against gains on the disposal of assets brought into the new group the companies are treated effectively as the same company. This treatment also applies in relation to the pre-entry proportion of allowable losses on the disposal of pre-entry assets. Similarly the companies are treated as one company in relation to the setting of losses against gains on the disposal of assets acquired, before or after entry to the new group from third parties where the same trade has continued uninterrupted throughout the period.

Change of a company’s nature

This paragraph relates to the elements in paragraph 3 which require the trade of a company to continue uninterrupted from before to after entry into a new group.

par 4(1) Provision is made that in any 3 year period during which a company enters a group and where either the nature of the company’s trade alters fundamentally or reactivates after having been essentially dormant, the activity (if any) which was carried on before entry is to be disregarded for the purpose of paragraph 3. This means that a gain on the disposal of assets, acquired after entry from 3rd parties, can be reduced by pre-entry losses even though the trade has changed.

par 4(2) An indication of what is meant by a change in the nature or conduct of a trade is given and includes a change which is gradual and which extends over a period greater than 3 years.

par 4(3) The time limit for assessments in relation to such changes is extended to 6 years after the time of entry into the new group.

Companies changing groups on certain transfers of shares, etc

par 5 This paragraph specifies these circumstances as follows —

  • where a company changes from membership of one group to another because of a disposal of shares, etc in that company, and
  • the disposal is one to which neither a gain or loss accrues to the disponer by virtue of any provision in the Tax or Capital Gains Tax Acts. This could be as a result of a merger of two companies or a reconstruction of a group.

In these circumstances the period of membership of the first group is included in the period of membership of the second group and “pre-entry losses” and the pre-entry proportion of allowable losses on the disposal of “pre-entry assets” are determined with reference to the time the company joined the first, not the second, group. Without this provision there could be a restriction on allowability of losses caused by the sale of shares as part of the reconstruction. Such a restriction would not be appropriate in these circumstances.

Relevant Date: Finance Act 2021