Revenue Note for Guidance

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Revenue Note for Guidance

247 Relief to companies on loans applied in acquiring interest in other companies

Summary

This section provides, subject to certain restrictions, relief for companies in respect of interest on a loan used to:

  • acquire directly, or indirectly through a single holding company, an interest in a trading company or a company whose income arises wholly or mainly in the form of rents or other income from property (that is, a “Case V income” company),
  • on-lend to such a company,
  • acquire, or to on-lend to in certain circumstances, a holding company that indirectly holds an interest in a trading company through one or more intermediate holding companies, or
  • pay off a loan the interest on which would have qualified for relief if it were not paid off.

The main conditions to be satisfied before the relief is given is that:

  1. when the interest is paid the investing company must have a material interest in the company, or where the loan is on-lent and used by a company connected with the company, in the company and connected company, and
  2. taking as a whole the period from the application of the loan until the interest is paid:
    1. the investing company must have at least one of its directors on the board of the other company or, where the loan is on-lent and used by a company connected to the other company, in the company and the connected company.
    2. the investing company must not have recovered or be deemed to have recovered any capital from the company or from a connected company, apart from any amount taken into account under section 249.

With effect from 2 February 2006, certain restrictions apply on the offset of interest under the section. From that date relief for interest is not available in respect of interest paid by an investing company on a loan made to it by a company which is connected with it where the loan is used to acquire ordinary share capital of a company that is also connected with the investing company, or to on-lend to another company which uses the funds directly or indirectly to acquire capital of a company that is connected with the investing company. A number of exceptions to this restriction are provided for in paragraphs (d) to (h) of subsection (4A) (see below).

With effect from 21 January 2011, certain further restrictions apply on the offset of interest under the section. Where the company which uses the loan is wholly or mainly a trading company, then the loan must be used wholly and exclusively for the purposes of that trade. Where the company which uses the loan is a “Case V income” company, then the loan must be used wholly and exclusively in the purchase, improvement or repair of the premises to which the profits or gains relate. Where the company which uses the loan is a holding company that holds shares directly in a trading company, then the loan must be used wholly and exclusively for the purpose of holding stocks, shares or securities.

With effect from 19 October 2017, relief applies for interest on a loan used to acquire, or in certain circumstances lend to, a holding company that indirectly holds shares in a trading company through one or more intermediate holding companies provided the monies are used for certain prescribed purposes.

Subject to some exceptions, relief is not available in respect of interest paid on loans from a connected company for the purposes of financing the purchase of certain assets from a connected company.

There is also a restriction on the amount of interest relief that may be claimed by an investing company that provides funds to a trading company for the purposes of expenditure incurred by the trading company on the provision of a specified intangible asset within the meaning of section 291A. The restriction applies so as to ensure that the aggregate amount of interest relief claimed by the investing company cannot exceed the amount of interest that would be deductible in the hands of the trading company under section 291A if that company had itself incurred the interest. Subsections (4B), (4C) and (4D) contain the detailed provisions to achieve this purpose.

Finally, the section contains definitions for this section and sections 248 and 249.

Section 249 contains anti-avoidance provisions applicable to this section.

Details

Definitions

“control”” is to be construed in accordance with section 432.

“intermediate holding company”” means a company whose business consists wholly or mainly of the holding of stocks, shares or securities and is in relation to an investee company, a company through which that investee company indirectly holds stocks, shares or securities in a trading company or companies.

“material interest”” means the beneficial ownership of the ability to control, directly or indirectly, more than 5 per cent of the ordinary share capital of the company.

““trading stock”” is to be construed in accordance with section 89.

Application

(2) The section applies to interest on money borrowed —

(2)(a)
  • to acquire ordinary shares of —
    • a trading company,
    • a ““Case V income”” company,
    • a company the business of which consists wholly or mainly of holding stocks, shares or securities directly in a trading company,
    • a company the business of which consists wholly or mainly of holding stocks, shares or securities of a trading company indirectly through an intermediate company or companies, or
    • a company the business of which consists wholly or mainly of the holding of stocks, shares or securities directly in a ““Case V income”” company.
(2)(b)
  • to lend to such a company money which is used wholly or exclusively:
    • where the company is a trading company, for the purposes of the trade or trades of that company,
    • where the company is a Case V company, in the purchase, improvement or repair of premises to which the profits or gains relate,
    • where the company is a company the business of which consists wholly or mainly of the holding of stocks, shares or securities directly in a trading company, for the purposes of holding such stocks, shares or securities.
    • where the company is a company the business of which consists wholly or mainly of holding stocks, shares or securities of a trading company indirectly through one or more intermediate holding companies, for the purposes of acquiring and holding stocks, shares or securities in a trading company indirectly, or
    • where the company is a company the business of which consists wholly or mainly of holding stocks, shares or securities of a trading company directly in a ““Case V income”” company, for the purposes of holding such stocks, shares or securities.
(2)(ba)
  • to lend to a trading company or a Case V company money which is used wholly or exclusively by a connected company –
    • where the connected company is a trading company, for the purposes of the trade or trades of that company,
    • where the connected company is a Case V company, in the purchase, improvement or repair of premises to which the profits or gains relate,
    • where the connected company is a company whose business consists wholly or mainly of the holding of stocks, shares or securities directly in a trading company, for the purposes of holding such stock, shares or securities.
    • where the connected company is a company the business of which consists wholly or mainly holding of stocks, shares or securities directly in a ““Case V income”” company, for the purposes of holding such stock, shares or securities,

A holding company being a company that holds stocks, shares or securities in a trading company indirectly through one or more intermediate holding companies, is specifically excluded from the scope of paragraph (ba) of subsection (2) as it is dealt with in paragraph (bb).

(2)(bb)
  • to lend to a holding company, being a company that holds stocks, shares or securities in a trading company indirectly through one or more intermediate holding companies, money which is on-lent by that company to a connected company and that connected company uses the money wholly and exclusively:
    • where the connected company is a company whose business consists wholly or mainly of the holding of stocks, shares or securities directly in a trading company, for the purposes of acquiring and holding any part of the ordinary share capital of a trading company, or
    • where the connected company is a company whose business consists wholly or mainly of the holding of stocks, shares or securities of a trading company indirectly through one or more intermediate holding companies, for the purpose of acquiring and holding any part of the ordinary share capital of a holding company that directly holds stocks, shares or securities in a trading company.

Acquisition of Share Capital

(2A) Where a loan to an investing company is applied in subscribing for share capital of another company, the capital must be used wholly and exclusively either by that company or a company connected with it, as the case may be, for the purposes of its trade, in the purchase, improvement or repair of premises, or for the purposes of holding stock, shares or securities. Where the company which uses the capital is a company whose business consists wholly or mainly of the holding of stocks, shares or securities

  • directly or indirectly in a trading company, or
  • directly in a Case V company,

it must be used for the purposes of holding such stocks, shares or securities.

Anti-avoidance

(2B) Subsections (2)(a)(iv), (b)(iv) and (bb) only apply to a company whose business consists wholly or mainly of the holding of stocks, shares or securities of a trading company indirectly through one or more intermediate holding companies where it and each intermediate holding company exists for bona fide commercial reasons and not as part of a scheme or arrangement the purpose of which or one of the purposes of which is the avoidance of tax. In the case of a third party acquisition of shares, satisfaction of this criteria can be considered by the acquirer group post acquisition.

The relief

(1) & (3) Relief is available for a company in respect of interest on a loan obtained for any of these purposes provided that the company fulfils certain conditions in relation to the company in which the loan was invested or a company connected with that company. These conditions are —

  • when the interest is paid the investing company must have a material interest (“material interest” is the beneficial ownership of or the ability to control directly or indirectly more than 5 per cent of the ordinary share capital of the company) in the company, or where the loan is on-lent and used by a company connected with the company (a connected company is a company which is a trading company, a “Case V income” company or a holding company of the type referred to in subsection (2)(a), subsection (2)(ba) or subsection (2)(bb), and which is regarded as connected with the company by virtue of section 10), in the company and the connected company
  • during the period taken as a whole from applying the loan to the time when the interest was paid at least one director of the investing company was also a director of the company or, where the loan is on-lent and used by a company connected with the other company, in the company and the connected company,
  • during that period the investing company did not recover any capital from the company or from a connected company, apart from any amount taken into account under section 249.

Use of the loan

(4) The loan must have been made in connection with the application of the money and must have been made either on the occasion of its application or within what is in the circumstances a reasonable time, and the loan must not have been applied for some other purpose before being applied as described in subsection (2). The placing on temporary deposit (for example, with a bank or a building society) of loans of predetermined amounts should not be regarded as an application of the loans for “some other purpose”.

Restriction of relief

(4A)(a) The section does not apply to a loan made to an investing company by a company that is connected with the investing company in certain circumstances. The relief will not be available if the loan is used by the investing company to acquire from a company that is connected with the investing company ordinary share capital of a company (the “target company”). The company from which the share capital is acquired can be the target company where that company issues shares to another company. The test as to whether there is a connection between the investing company and the company from which the shares are being acquired is applied at the time of acquisition of the shares and immediately after that acquisition.

In addition, relief will not be available if the loan is used by the investing company to lend to another company, money which is used directly or indirectly to acquire any part of the capital of a company that is connected with the investing company.

(4A)(b) The restriction of relief in paragraph (a) cannot be avoided by way of back-to-back loan arrangements. This prevents relief being available in a situation where an investing company borrows from a third party but where that third party receives an equivalent funding from a company connected with the investing company. If there is such a back-to-back loan arrangement, the loan is regarded as made to the investing company by a connected person.

Exceptions to restrictions

(4A)(c) The restriction of relief in paragraph (a) does not apply if two conditions are met.

(4A)(c)(i) The first condition is that the loan is used either to acquire share capital on its issue or to lend on to another company to acquire such capital on its issue.

(4A)(c)(ii) The second condition is that the new share capital is issued for the purposes of increasing the capital available to the target company for use in its trade or business. However, the issue of the share capital must not be a part of any arrangement in connection with the original loan designed to achieve a circular flow of money that could involve the provision of money directly or indirectly to persons and in the following circumstances:

(4A)(c)(ii)(I)
  • to the person who made the original loan to achieve effective repayment of the loan or the greater part of it.
(4A)(c)(ii)(II)
  • to “a person connected with” the person who made the original loan to achieve effective repayment of the loan or the greater part of it, even though the moneys are provided to a person other than the lender.

Relevant income

(4A)(d) A further relaxation of the restriction under paragraph (a) is provided for where there is a matching income (which is referred to as “relevant income”) arising from the making of the loan.

(4A)(d)(i) A description of “relevant income” is provided for. The relevant income may consist of interest or dividends that are chargeable to corporation tax. In the case of interest, such matching could arise where the loan is used directly by the investing company, or indirectly through another company or a series of companies. The type of interest that can be regarded as relevant income is interest that is not deductible in computing for corporation tax purposes income or profits of the investing company, or any company connected with it, and that is taken into account in computing income chargeable to corporation tax of the company that receives it.

(4A)(d)(ii) For dividends to be regarded as relevant income, the dividends must be chargeable to corporation tax in the State.

The further requirement is that the interest or dividend income must be income that would not have arisen but for the direct or indirect use of the original loan.

(4A)(e) The further relaxation of the restriction of relief under paragraph (a) in the case of relevant income applies as follows. The denial of relief under paragraph (a) is not to apply to the investing company in respect of so much of the interest on the “section 247 loan” as does not exceed relevant income of the investing company for the accounting period concerned.

Where interest on the section 247 loan exceeds the relevant income of the investing company, the excess can be set off against relevant income of companies connected with the investing company. The conditions to be met before that can apply are as follows:

(4A)(e)(i)
  • The first condition is that the section 247 interest exceeds the relevant income of the investing company;
(4A)(e)(ii)
  • The second condition is that the interest is not otherwise deductible;
(4A)(e)(iii)
  • The third condition is that the investing company and a connected company must jointly make an election;
(4A)(e)(iv)
  • The final condition provides that the total amount of interest relieved against relevant income of all companies connected with the investing company cannot be greater than the interest that is not used by the investing company.

The amount that can be set off against relevant income of a connected company is limited to the lower of:

under clause (I):

the proportion of relevant income of the period that is common to the accounting period of the investing company and the connected company, and

under clause (II):

the relevant income of the company less any amount of losses set against it under group relief or that could have been set off (under section 396(2)).

Back to back loans

(4A)(f) Provision is made against the use of a back-to-back loan made in order to avoid the restriction on offset against relevant income that applies where the interest concerned is deductible for tax purposes in computing income of the investing company or a company connected with it. The provision counters a situation where interest could otherwise be routed through a third party so that the interest that might qualify as relevant income is not deductible in computing income of the investing company or a connected company. Where such a back-to-back loan arrangement arises, interest received from the third party and which would otherwise qualify as relevant income will be treated as interest that is deductible in computing income of the investing company or a company connected with it.

Exchange gains & losses

(4A)(g) Any gains or losses arising from exchange rate movements that relate to the relevant income, or to the underlying loans or investments, are to be taken into account in calculating the relevant income. Gains and losses on hedging contracts to protect against exposure to exchange rate or interest rate fluctuations are also to be taken into account in determining relevant income.

(4A)(h) A modification is made to one aspect of the application of paragraph (c). That paragraph allows interest relief to apply in respect of a loan if the loan is used to defray money applied in acquiring newly issued ordinary share capital. This, however, is subject to the condition that the issue of the share capital must not be part of an arrangement in connection with the original loan that is designed to achieved a circular flow of money that would involve the effective repayment of the original loan to the person who made it (or to a connected person).

The modification provides that it should not be presumed that such an arrangement exists solely because the share capital is used in paying off to the person who made the section 247 loan (or to a connected person) another loan. This, however, only applies where the other loan was used wholly and exclusively for the purposes of a trade or business and was not itself part of a circularity arrangement, and interest on the other loan would have been deductible if it was not paid off.

Special provisions in relation to specified intangible assets

(4B) Subsection (4B) provides for a restriction on the amount of interest deductible by an investing company where that company provides funds to another company [‘other company’] either by way of subscription for share capital or the loan of money, and that other company uses the funds to provide specified intangible assets in respect of which an allowance is to be made under section 291A. The restriction will be applied to the interest paid by the investing company on the loan – less any dividends, distributions or interest received from the other company in respect of the moneys advanced – and the subsection specifies that such interest cannot exceed the amount of interest that would be deductible in the hands of that other company, under section 284 as applied by section 291A, were that other company to incur the interest expense and if any additional restriction resulting from this were to be made solely by restriction of interest.

(4C) Subsection (4C) provides that any excess interest that has not been relieved due to the restriction under subsection (4B) above shall be carried forward to be treated as interest paid in the next accounting period of the company for which relief, subject to subsection (4B), can be given and so on for each succeeding accounting period.

(4D) Subsection (4D) provides for an apportionment of amounts where the corresponding accounting period of the investing company and the other company do not coincide.

Intra-group loans to finance the purchase of assets from another group company

(4E) Relief under this section is not available in respect of interest on an intra-group loan used to finance the purchase of assets from another group company.

(4E)(a) For the purposes of this subsection assets do not include share capital, intellectual property or trading stock.

(4E)(b) Subject to paragraphs (c) to (f) of this subsection, relief will not be available in respect of interest paid on loans from a connected company for the purposes of purchasing assets from a connected company.

(4E)(c)(i) An exception to the rule in paragraph (b) is provided for in the case of a loan to acquire a trade from a company which is not within the charge to corporation tax. In such a case the amount of the interest which can be deducted is restricted to the profits of the trade acquired.

(4E)(c)(ii) & (iii) Where a company acquires part of a trade that part is treated as a separate trade. Where the company begins to carry on the activities of the acquired trade as part of its trade the profits or gains of the integrated trade are apportioned on a reasonable basis for the purposes of restricting relief under this subsection.

(4E)(d) This subsection provides for similar treatment in cases where assets are acquired by a leasing company which generate a new stream of income. The amount of the relief to be given in respect of the interest paid in the accounting period by the investing company on the loan is restricted to the amount of the new income generated by the asset acquired.

(4E)(e) Where the accounting period of the investing company does not coincide with the accounting period of the company to which it made the loan, then for the purpose of computing any restriction of relief for an accounting period as required by paragraphs (c) and (d) the profits or gains are to be apportioned.

(4E)(f) This is an anti-avoidance provision preventing companies circumventing the subsection through the use of back-to-back loans with unconnected persons.

Restriction of relief where borrowed monies are lent on

(4F) Relief due to the investing company is restricted where the companies which use the borrowed monies are in receipt of interest from the lending on of those monies.

Relevant trading charges

(4G) Interest on loans applied in lending money to a trading company is treated as a relevant trading charge on income and can only be set against income chargeable at 12.5% or relieved on a value basis at 12.5%.

Granting of relief

(5) & (6) Interest eligible for relief under this section is to be treated as a non-retainable charge on the borrower’s income for the year of assessment in which interest is paid. This enables relief to be given by repayment if necessary. In other words, the interest is to be treated as a deduction in computing the amount of the borrower’s income chargeable to tax. Interest eligible for relief under this section is not eligible for relief under any other provision.

Relevant Date: Finance Act 2020