Revenue Note for Guidance
This section was inserted by section 42 of the Finance Act 2012. The section en-ables a company that is paying interest to other group companies to elect to have section 130(2)(d)(iv) disapplied in certain circumstances and applies in respect of accounting periods commencing on or after 1 January 2012.
(1) Definitions of the terms used in the section are as follows:
‘additional tax’ is defined in relation to a territory. It is calculated by the formula:
A x B/100
where—
A is the specified amount for that territory in respect of the qualifying company for the accounting period, and
B is the rate per cent specified in section 21(1)(f) (currently 12.5%).
The application of this formula produces a notional amount of Irish tax that would be payable on the specified amount of interest (ie amount of interest that is non-deductible under section 130(2)(d)(iv)) paid by the qualifying company to companies in a particular territory for an accounting period;
‘deductible amount’ is defined in relation to a territory for an accounting period. It is calculated by the formula:
C x D/E
where-
C is the amount of non-deductible interest paid to that territory for the ac-counting period,
D is the specified tax (i.e. see below, essentially the lower of the notional Irish tax and the foreign tax paid) paid on that interest in that territory, and
E is the notional Irish tax on that interest;
‘foreign tax’ is the amount determined by the formula:
F x G/100
where-
F is the amount of interest payable in an accounting period to a company car-rying on a business in a territory, and
G is the rate of tax chargeable in that territory-
‘interest’ means interest other than yearly interest or interest to which subsection (2B) of section 130, subsection (2)(a) or (3A)(a) of section 452 or subsection (2) of section 845A applies;
‘qualifying company’ is defined as a company that advances money in the ordinary course of a trade carried on in the State which includes the lending of money and for which any interest payable in respect of money so advanced is taken into ac-count in computing the income of its trade;
‘specified amount’ is defined in relation to a territory and means the amount of in-terest payable for an accounting period by the qualifying company to a company or companies carrying on business in the territory where the interest payable is taken into account in computing the profits or gains of that business in that territory;
‘specified interest’ is defined as the interest payable by the company that, apart from this section, would be treated as a distribution by virtue of section 130(2)(d)(iv);
‘specified tax’ is defined as the lesser of the notional Irish tax on the specified amount and the total foreign tax paid on the income.
Subsection (2) provides that section 130(2)(d)(iv) shall not apply to the deductible amount for a territory for an accounting period.
Example
Treasury Company pays interest to Country A in the sum of €100,000 and Country B in the sum of €50,000. |
Ireland does not have a tax treaty with either country. |
The rate of tax in Country A is 30%. |
The rate of tax in Country B is 10%. |
Country A |
The deductible amount in respect of Country A will be computed as follows: |
C X D/E |
C = The “specified amount”, |
D = “Specified tax” in relation to the “specified amount”, |
E = “Additional tax” in relation to the “specified amount”, |
C in this case = €100,000, |
D in this case is €12,500 calculated as follows- |
D is the lesser of – |
“Additional tax” in relation to the “specified amount which is calculated as follows- |
A X B/100 |
€100,000 X 12.5/100 = €12,500, |
And aggregate of “foreign tax”- |
€100,000 × 30/100 = €30,000, |
E in this case is €12,500 calculated as above. |
The deductible amount for Treasury Company in this case is therefore €100,000: |
C X D/E |
€100,000 × €12,500/€12,500 = €100,000. |
In summary, as the foreign rate of tax is higher than the Irish rate of tax, a full deduction is available for interest paid by Treasury Company. |
Country B |
The deductible amount in respect of Country B will be computed as follows: |
C × D/E |
C = The “specified amount”, |
D = “Specified tax” in relation to the “specified amount”, |
E = “Additional tax” in relation to the “specified amount”, |
C in this case = €50,000, |
D in this case is €5,000 calculated as follows- |
D is the lesser of – |
“Additional tax” in relation to the “specified amount which is calculated as follows- |
A × B/100 |
€50,000 × 12.5/100 = €6,250, |
And aggregate of “foreign tax” |
€50,000 × 30/100 = €5,000, |
E in this case is €6,250 calculated as above. |
The deductible amount for Treasury Company in this case is therefore €40,000- |
C × D/E |
€50,000 × €5,000/€6,250 = €40,000 |
In summary, as the foreign rate of tax is lower than the Irish rate of tax, the deduction available for interest paid by Treasury Company is restricted. |
Relevant Date: Finance Act 2021