452 Application of section 130 to certain interest

Summary

This section is concerned with interest which may be payable by a company to a parent company outside the State. Under section 130(2)(d)(iv) such interest could be treated as a distribution and, therefore, would not be deductible as a trading expense.

As a result of direct foreign investment into Ireland many Irish companies are subsidiaries of foreign companies. The activities of such companies are often financed by monies lent to the Irish entity by the foreign parent and interest is payable to that parent.

Under section 130(2)(d)(iv) such interest, if it were payable to a non-resident company of which the Irish company is a 75 per cent subsidiary or associate, could be treated as a distribution and, therefore, would not be deductible as a trading expense. This section allows such interest to escape the ambit of section 130(2)(d)(iv) if a company so wishes where the interest is payable to a company which is a resident of a tax treaty country, or an EU Member State. In some cases, because of the circumstances of the company and/or the terms of a double taxation agreement, it may be more advantageous to the company to accept the application of section 130(2)(d)(iv). Therefore, the application of the section is at the option of the company.

Since 1 February 2002 the section is extended to yearly interest paid to a non-resident company wherever resident.

Details

Definitions

(1) “arrangements” are double tax treaties which are given the force of law by way of Government order under section 826(1)(a) or which will have the force of law on completion of the procedures set out in section 826(1).

“relevant territory” is a country which is a member of the EU, a country with which Ireland has a tax treaty in force or a country with which Ireland has signed a tax treaty which has yet to come into force.

“tax” is a tax imposed by a relevant territory which corresponds to Irish corporation tax.

Where a tax treaty is in force or there is a signed tax treaty which has yet to come into force with a relevant territory the rules of the tax treaty apply in determining whether the company is a resident of that territory. Where the country is an EU Member State and there is no tax treaty with that Member State the tax law of the country concerned determines whether the company is a resident of that country.

Interest payable to a company resident in a tax treaty country or EU Member State

(2) The interest to which the section applies is interest which is a distribution by virtue only of section 130(2)(d)(iv). It must, therefore, be interest payable to a non-resident company of which the Irish company is a 75 per cent subsidiary or associate. The word “only” is important in that it ensures that any excess interest is not covered by this section and is, in fact, treated as a distribution under section 130(2)(d)(iii)(II) which is designed to catch an excess over what is a “reasonable commercial return” on a loan.

The interest concerned must also be payable by a company in the course of its trade and be deductible for tax purposes but for the rule in section 130(2)(d)(iv). Excluding the application of section 130(2)(d)(iv) should result in the interest being treated as a trading expense.

The interest must be payable to a company resident in a EU Member State, resident in a country with which Ireland has a double taxation agreement in force or resident in a country with which Ireland has signed a double taxation agreement.

The company has to claim the benefit of the section and that where it does so, the interest is excluded from the ambit of section 130(2)(d)(iv).

Yearly interest payable to companies in non-treaty countries

(3A) The interest concerned must also be payable by a company in the course of its trade and be deductible for tax purposes but for the rule in section 130(2)(d)(iv). Excluding the application of section 130(2)(d)(iv) should result in the interest being treated as a trading expense.

Yearly interest payable to a company resident in a country with which Ireland has a double taxation agreement or another EU Member State is dealt with in subsection (3) and is not within subsection (3A).

Elections

(4) An election has to be in writing and has to be submitted with the company’s return of profits for the period in question.

Relevant Date: Finance Act 2021