438 Loans to participators, etc

Summary

This section is designed to counter the device of withdrawing profits in the guise of loans. It imposes on a close company a charge to income tax at the standard rate on the grossed up equivalent of a loan or advance made by the company to a participator or an associate of the participator, if the company’s business does not include the making of loans. The amount assessed is not regarded as a charge deductible for corporation tax purposes. There are provisions for giving relief to the company on due claim, in respect of any part of the loan or advance repaid to the company. The section does not apply where the loan does not exceed €19,050 and the borrower works full-time for the company or an associated company and has not a material interest in the company.

An amount on which the company has to account for tax under this section is not income of the recipient. If the loan is released or written off, however, it becomes income of the recipient in accordance with section 439.

Details

(1) Where a close company (whose business does not include the making of loans) makes a loan or gives an advance to a participator, or an associate of a participator, the company is to be assessed to income tax at the standard rate on the grossed up amount of the loan or advance for the year of assessment in which the loan or advance is made. The amount assessed is not to be regarded as a charge deductible for corporation tax purposes.

(2) A close company is to be regarded as making a loan to any person who incurs a debt to the company or where a debt due from a person to a third party is assigned to the company. Excluded are debts for the supply of goods or services in the ordinary course of the business of the close company unless the credit given exceeds 6 months or is longer than the period normally given to the company’s customers.

(3) The section is not to apply where the total of all loans or advances by the close company or an associated company (including loans or advances to the borrower’s spouse or civil partner) does not exceed €19,050 and the borrower not only works full-time for the company or an associated company but also has not a material interest in the company. However, if the borrower acquires such a material interest, the outstanding amount of any loan or advance is treated as coming within the scope of the section.

(4) Relief to a company assessed to tax under this section is provided for in respect of any part of a loan or advance repaid to the company. The relief must (notwithstanding the general time limit for making a claim for a repayment of tax contained in section 865) be claimed within 4 years from the end of the year of assessment in which the loan or advance is repaid.

(5) Circumvention of the section by the interposition of an intermediary between the company and the borrower is prevented. For example, arrangements could be made for a close company to make a loan to which this section would not apply, and for some person (not the close company) to make a payment or transfer property to a participant in the close company or to an associate. Unless the money or property received by the participator is taxable as his/her income this subsection ensures that the section applies to the original loan as if the original loan had been made by the close company to the participator or associate.

(6) The section is extended to cover a loan made by a close company to another company acting in a representative capacity or to a company resident outside the EU or United Kingdom.

(7) A participator in a company which controls another company is regarded as a participator in the other company. Also imported is the definition of “material interest” contained in section 437(2).

(8) For the purposes of this section, a registered industrial and provident society is treated as a close company if it would be such but for the exclusion of such societies contained in section 430(1)(b). Accordingly, loans and advances made to a participator in such a registered industrial and provident society (if it is a close company following the application of the rules contained in section 430 as modified by this provision) may be subject to a charge to tax under this section.

Relevant Date: Finance Act 2021