Revenue E-Brief

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Revenue E-Brief Issue 11/2011, 15th February 2011

Finance Act 2011 – Interest Payable on Loans

The Finance Act 2011 made changes to the treatment of interest on certain loans for Corporation Tax purposes.

Section 36 of the Act inserted a new section 840A into the Taxes Consolidation Act 1997 (TCA 1997). Section 840A denies a trading deduction for interest payable on intra-group borrowings to acquire certain assets from a connected company.

Section 37 of the Act amended section 247 TCA 1997. Section 247 no longer permits interest on intra-group borrowings, used to finance the acquisition of certain assets from another group company, to be treated as a charge on income.

This eBrief provides guidance on the treatment under the new provisions of certain financial and leasing assets; transfers of assets coupled with loans; and the making of a loan.

This guidance is for the purposes of section 840A TCA 1997 and the amendments made to section 247 TCA 1997 by section 37 of the Finance Act 2011.

1. Financial Assets and Leasing Assets

The following assets will be treated as acquired as trading stock where they are acquired for bona fide commercial purposes and the entire proceeds on their sale would be trading receipts of the trade concerned:

  • In the case of a company such as a bank or treasury company, which advances money in the ordinary course of a trade that includes the lending of money (the interest receivable on which is trading income), all financial assets.
  • In the case of a company that exists wholly or mainly for the purposes of carrying on a trade of leasing machinery or plant, all machinery or plant acquired for the purpose of leasing and all assets ancillary to leasing of machinery or plant.

2. Assets Coupled with Loans

Where an asset and its funding are transferred together in a bona fide reorganisation of the businesses of a group of companies, so that -

  • a company disposes of an asset to another group company,
  • that other company takes on (by novation) indebtedness in the amount outstanding on the loan which funded the acquisition of the asset by the company making the disposal, and
  • interest on that funding loan was deductible under the Tax Acts before its novation,

then interest payable on the loan after its novation will be treated as continuing to be so deductible.

3. Making of Loans

The making of a loan will not be treated as the acquisition of an asset.