Restriction on deductibility of certain interest

Summary

This section provides for a restriction in certain circumstances on the deductibility of interest in the case of interest payable by a person to a connected person. The restriction applies where the interest is a trading expense of the person by whom it is payable but is not taken into account as a trading receipt of the person to whom it is payable. Broadly, the section provides that cumulative deductions for loan interest cannot exceed cumulative amounts that are chargeable to tax in respect of the interest in the hands of the connected person. The section does not apply where the recipient of the interest is both non-resident and not under the ultimate control of Irish residents.

Details

Definitions

(1) “chargeable period” and “basis period” have the same meanings as in section 817B.

“relevant date” is defined in relation to a chargeable period as the date on which the basis period for that chargeable period ends.

“relevant liability” is defined as a liability of one person to another.

Circumstances in which the section applies

Subject to the exceptions set out in subsection (2A), the circumstances in which the section applies are where —

• (2)(a) interest is payable, directly or indirectly, by one person to a connected person [The interest must be interest that, if paid, would be chargeable to tax under Schedule D. Consequently, interest that is Irish sourced is covered by the provision while interest that is not Irish sourced is not. This would be relevant where interest is payable by a non-resident company that has an Irish branch and where some of the interest is attributed as an expense of the Irish branch],
• (2)(b) the interest is an allowable trading expense (or would be so allowable apart from this section), and
• (2)(c) the interest is not taken into account in computing trading income of the connected person or, where the connected company is not chargeable to tax in respect of the interest, the interest would not be so taken into account if that connected person were Irish-resident.

Circumstances in which the section does not apply

(2A)(a) The section does not apply to lenders who are not resident in the State and who are not controlled, either directly or indirectly, by persons resident in the State.

(2A)(b)(i) The definition of “control” mirrors the provisions in section 172D which deals with exemptions from dividend withholding tax for certain non-resident companies which are not under the ultimate control of Irish residents.

(2A)(b)(ii) Non-resident companies, which are immediately controlled by Irish residents but ultimately controlled by non-residents are also covered by the exclusion.

Restrictions

(3) A restriction is placed on the amount of interest that can be allowed in computing taxable income of the person by whom it is payable. Such interest will not be allowable in computing trading income of a company to the extent that it is greater than an amount determined by the formula A–B.

This ensures against a mismatch between allowable interest and chargeable interest.

Carry forward of unallowed interest

(4) Where interest is not allowable for a chargeable period by virtue of the application of the above restriction it is carried forward to the next chargeable period and treated as being payable in the basis period for that chargeable period. In this way, an interest deduction will not be denied but will be deferred until chargeable interest on the liability “catches up” with allowable interest on it.

Anti-avoidance

(5) The restrictions will also apply if arrangements have been made by a person (person A) under which—

• interest is payable by person A to another person and the section does not apply solely because they are not connected with each other, and
• interest is payable by a person to another person (person C) who is connected with person A and the section does not apply by virtue solely of the fact that person C and the person from whom C receives the interest are not connected.

Relevant Date: Finance Act 2021