134 Limitation on meaning of “distribution” in relation to certain payments made in respect of “foreign source” finance

Summary

The section provides rules in respect of loans, known generally as “section 84” loans (in the context of the Taxes Consolidation Act, 1997, the corresponding section is section 130 and the reader should be aware of the possibility of such loans been referred to as “section 130” loans – where necessary in these notes the reference used is to “section 130”) where the lender is a company and the relevant principal concerned has been advanced out of share capital which is beneficially owned (directly or indirectly) by one or more persons resident outside the State. Other “section 84” loans are dealt with in section 133.

Details

Definitions

(1)(a) “agricultural society” and “fishing society” have the meanings set out in section 133(1)(a). Such societies must have a certain minimum number of members a majority of whom are engaged in husbandry or fishing, as the case may be.

“selling by wholesale” includes not only sales of goods for re-sale, but also goods sold for use in a trade or undertaking.

“specified trade” is a trade which consists wholly or mainly of the manufacture of goods (within the ordinary meaning of that term), including activities deemed for the purposes of manufacturing relief to be the manufacture of goods.

(1)(a) & (6) In relation to loans made before 13 May, 1986 (transitional arrangements cover loans being negotiated at that date) a specified trade can consist wholly or mainly of manufacturing activities or certain service activities in respect of which employment grants were made by the IDA under section 2 of the Industrial Development (No. 2) Act, 1981.

(1)(b) “specified trade” includes certain trades carried on by 75 per cent subsidiaries of agricultural or fishery co-operatives. The trades concerned include trades consisting of the selling by wholesale of agricultural products and fish, as appropriate.

(1)(c) A trade is regarded as consisting wholly or mainly of particular activities in an accounting period if, in that accounting period, not less than 75 per cent of the total amount receivable from sales made in the course of the trade comes from sales made in the course of those particular activities.

(1)(d) A qualifying shipping trade (as defined in section 407) is not regarded as a specified trade. This applies despite the fact that such a trade qualifies for manufacturing relief.

Application

(2) This section only applies to foreign sourced loans (that is, where the loan – the relevant principal – has been advanced out of share capital which is beneficially owned (directly or indirectly) by one or more non-resident persons).

Certain interest not to be a distribution

(3) Apart from the exceptions certain interest (or other distributions such as a premium on repayment of a loan) paid by a borrowing company to another company which is within the charge to corporation tax is not treated as a distribution. As the other company must be within the charge to Irish corporation tax this provision does not apply to interest (or other distribution) paid to a non-resident company (except where the non-resident company is carrying on a trade in the State through a branch or agency) or to any other person. The effect of this is that the interest (or other distribution) is effectively liable to corporation tax in the hands of the recipient company.

This provision affects interest, etc payable in respect of loans made to the borrower where the interest would otherwise be treated, under certain provisions of section 130(2)(d), as a distribution.

The provisions of section 130(2)(d) concerned are —

• subparagraph (ii), which treats interest as a distribution if the security for the loan is convertible into shares;
• subparagraph (iii)(I), which treats interest as a distribution if the level of interest is made dependent on the results of the borrower’s business; and
• subparagraph (v), which treats interest as a distribution where the security for a loan is tied to the holding by the lender of some shares in the borrowing company.

Exceptions

The rule in subsection (3), under which interest (or other distribution) is not to be treated as a distribution, does not apply in certain circumstances. These are —

• (4) more than a reasonable commercial return: where the interest (that is, the consideration given) on the loan represents more than a reasonable commercial return on the loan (in this case, however, the amount of interest which does represent a reasonable commercial return is not to be treated as a distribution, this is intended to ensure the effectiveness of the anti-avoidance measure of section 130 against excessive interest paid on loans), and
• (5) specified trades: where the borrower carries on a specified trade in the accounting period concerned and the interest would otherwise be a trading expense of that trade.

Relevant Date: Finance Act 2021