1013 Limited partnerships

Summary

This section provides that the right of limited partners (which for the purposes of this section includes non-active partners in partnerships generally) to set off interest paid, losses and capital allowances arising out of a partnership trade, is restricted to the amount of their contribution to the limited partnership trade and then only against the profits of the partnership trade – subject to specific commencement provisions.

While this section is primarily aimed at aggressive tax avoidance schemes, it does adopt a broad-brush approach to the problems in this whole area. For this reason, transitional arrangement apply in relation to particular schemes involving seaside resorts, car parks and other projects qualifying for double rent allowances, the White Fish Fleet, and renewable energy projects.

While this section is expressed to apply to a trade its provisions apply in a like manner to professions by virtue of section 1007(3).

Details

Definitions

(1) “active partner” is a partner who works for the greater part of his/her time on the day-to-day management or conduct of the partnership trade.

“the aggregate amount” —

• in the case of an individual, is the aggregate of amounts given or allowed to him/her at any time under any of the specified provisions (see below) —
  • in respect of a loss sustained by him/her in a trade, or of interest paid by him/her by reason of his/her participation in the trade, in any relevant year of assessment, or
  • as an allowance to be made to him/her for any relevant year of assessment either in taxing a trade or by way of discharge or repayment of tax to which he/she is entitled by reason of his/her participation in the trade, and
• in the case of a company, is the aggregate of amounts given or allowed to the company (called in the section the “partner company”) or to another company at any time under any of the specified provisions —
  • in respect of a loss incurred by the partner company in a trade, or of charges paid by it or another company by reason of its participation in the trade, in any relevant accounting period, or
  • as an allowance to be made to the partner company for any relevant accounting period either in taxing the trade or by way of discharge or repayment of tax to which it is entitled by reason of its participation in the trade.

“limited partner” is —

• (a) a person who is carrying on a trade as a limited partner in a limited partnership registered under the Limited Partnerships Act, 1907,
• (b) a person who is carrying on a trade as a general partner in a partnership, who is not entitled to take part in the management of the trade and who is entitled to have his/her liabilities, or his/her liabilities beyond a certain limit, for debts or obligations, incurred for the purposes of the trade, discharged or reimbursed by some other person,
• (c) a person who carries on a trade jointly with others and who, under the law of any territory outside the State, is not entitled to take part in the management of the trade and is not liable beyond a certain limit for debts or obligations incurred for the purposes of the trade,
• (d) a person who carries on a trade as a general partner but not as an active partner,
• (e) a person who carries on a trade as a partner in a partnership registered under the law of any territory outside the State, otherwise than as an active partner, or
• (f) a person who carries on a trade jointly with others under any agreement, arrangement, scheme or understanding which is governed by the law of any territory outside the State, in circumstances where the person does not work for the greater part of his or her time on the day-to-day management or conduct of the trade.

“relevant accounting period” is an accounting period of a partner company which ends on or after the specified date (22 May 1985) and at any time during which it carried on the trade as a limited partner.

“the relevant time” is —

• in the case of an individual, the end of the relevant year of assessment in which the loss is sustained or the interest is paid, or for which the allowance is to be made (except that where he/she ceased to carry on the trade during that year of assessment it is the time when he/she so ceased), and
• in the case of a partner company, the end of the relevant accounting period in which the loss is incurred or the charges are paid, or for which the allowance is to be made (except that where the partner company ceased to carry on the trade during that accounting period it is the time when it so ceased).

“relevant year of assessment” is a year of assessment which ends after the specified date (22 May 1985) and at any time during which the individual carried on the trade as a limited partner.

“the specified date” is 22 May 1985.

“the specified provisions” are the various provisions in the Tax Acts under which an individual or company may obtain relief in respect of losses, interest, charges and capital expenditure. These are —

• in the case of an individual, sections 245 to 255, 305 and 381, and
• in the case of a company, sections 243, 308(4), 396(2) and 420(1), (2) and (6).

Restriction of losses and capital allowances

(2)(a) In the case of an individual who is a limited partner in relation to a trade, relief may be given or allowed to that individual under any of the specified provisions —

• (2)(a)(i) in respect of a loss sustained by him/her in the trade or of interest paid by him/her by reason of his/her participation in the trade, in a relevant year of assessment, or
• (2)(a)(ii) as an allowance to be made to him/her for a relevant year of assessment either in taxing the trade or by way of discharge or repayment of tax to which he/she is entitled by reason of his/her participation in the trade,

(2)(a)(I) & (II) only to the extent that the amount to be given or allowed does not exceed the individual’s contribution to the trade at the relevant time. Where the contribution was made before 24 April 1992 relief may be given or allowed against other income. For contributions made on or after that date relief is confined to profits from the partnership trade.

(2)(a)(III)(A) Where the individual is a limited partner in relation to a trade by virtue of paragraph (d) (a general but not an active partner) of the definition of “limited partner” and the relevant year of assessment is 1997–98 or 1998–99 and the trade consists of the activity of producing, distributing, or the holding of or of an interest in, films or video tapes or the activity of exploring for, or exploiting, oil or gas resources, then, subject to subsection (2A) (commencement of this restriction), relief is given only against income consisting of profits or gains from that trade and then only to the extent that any relief given is restricted to the amount of his/her contribution to the partnership trade.

(2)(a)(III)(B) Where the individual is a limited partner in relation to a trade by virtue of paragraph (d) of the definition of “limited partner” and the relevant year of assessment is 1999–2000 or any subsequent year then, regardless of the activity which constitutes the trade, but subject to subsection (2B) (commencement of this restriction), relief is given only against income consisting of profits or gains from the trade and then only to the extent that any relief given is restricted to the amount of his/her contribution to the partnership trade.

(2)(a)(IV) Where the individual is a limited partner in relation to a trade by virtue of paragraph (e) or (f) of the definition of “limited partner” and the relevant year of assessment is 2005 or any subsequent year then relief is given only against income consisting of profits or gains from the trade and then only to the extent that any relief given is restricted to the amount of his/her contribution to the partnership trade.

(2)(b) In the case of a partner company which is a limited partner in relation to a trade, relief may be given or allowed to that company under any of the specified provisions —

• in respect of a loss sustained by the partner company in the trade, or of charges paid by the partner company or another company by reason of its participation in the trade, in a relevant accounting period, or
• as an allowance to be made to the partner company for a relevant accounting period either in taxing the trade or by way of discharge or repayment of tax to which it is entitled by reason of its participation in the trade,

only to the extent that the amount to be given or allowed, or, as the case may be, the aggregate amount, does not exceed the partner company’s contribution to the trade at the relevant time. Where the contribution was made before 24 April 1992 relief may be given or allowed against other income of the company or given or allowed to another company. Where the contribution was made on or after that date relief may be given or allowed only against profits from the partnership trade.

Contributions to a trade

(3)(a) A person’s contribution to a trade at any time is the aggregate of —

• the amount of capital which the person has contributed to the trade and has not subsequently, either directly or indirectly, received back from the partnership or from a person connected with the partnership (the amount of capital invested will not, however, be regarded as being reduced by any payments received from the trade in respect of expenditure which the person incurred on behalf of the partnership trade or in providing facilities for the trade), and
• the amount of any profits or gains of the trade to which the person is entitled but which the person has not received in money or money’s worth.

(3)(b) A person is regarded as having received back an amount which the person has contributed to the partnership trade if —

• the person received consideration of that amount or value for the sale of the person’s interest, or any part of the person’s interest, in the partnership,
• the partnership, or any person connected with the partnership, repays that amount of a loan or an advance from the person, or
• the person receives that amount of value for assigning any debt due to the person from the partnership or any person connected with the partnership.

Treatment of general partners as limited partners

(4) Where there is any agreement, arrangement, scheme or understanding in connection with an investment made on or after the 11 April 1994 by a general partner in a partnership trade which provides that either —

• the general partner is obliged to retire from the partnership before being entitled to a refund of the investment, or
• the ability of a creditor of the general partner or of the partnership to recover a debt from the general partner is restricted,

the general partner is regarded as a limited partner and all of the restrictions in the section apply in relation to the investment. The restriction applies to any amount of interest, loss or allowance which would not have arisen in the absence of the making of the investment.

Commencement, etc

(5) The restricting of relief to income from the partnership trade in respect of contributions made on or after 24 April 1992 applies to contributions which would otherwise be disallowed under the section but for a contribution to the trade on or after that date. The amounts would have been disallowed because the person would already have got relief up to the amount invested by him/her in the partnership. In the case of certain limited partnerships carrying on the management and letting of holiday cottages the restriction applies in respect of contributions made on or after 1 September 1992 instead of 24 April 1992.

(2A) The effective date as respects the restrictions imposed by this section is 28 February 1998 where an individual is a limited partner by virtue of paragraph (d) (a general but not an active partner) of the definition of “limited partner” and the trade consists of the activity of producing, distributing, or the holding of or of an interest in, films or video tapes or the activity of exploring for, or exploiting, oil or gas resources.

(2B) In the case of any other trade carried on by a limited partnership, the effective date as respects the restrictions imposed by this section is 1 March 2000 where an individual is a limited partner by virtue of paragraph (d) (a general but not an active partner) of the definition of “limited partner”. This is subject to the transitional measures provided for in the case of certain trades – see below.

It should be noted that the reference to a “loss” in paragraph (c) of subsections (2A) and (2B) is a reference to a loss sustained in a trade as such and not to a “loss” created, or to the part of a loss which is referable to capital allowances used, under section 392 for the purposes of making a claim under section 381. Accordingly, capital allowances used in such a manner are not affected by the new restrictions provided the expenditure giving rise to such allowances was incurred on or before 29 February 2000.

Transitional measures

(2C) The transitional measures provide for the non-application of the restrictions contained in this section in the case of certain individuals who would otherwise be affected.

Definitions

(2C)(a) “excepted expenditure” means—

• capital expenditure to which the restrictions contained in section 409A apply (this provision limits to €31,750 the amount of capital allowances an individual may off-set against other income), and
• certain capital expenditure specifically excluded from the provisions of section 409A and from section 409B. This expenditure is expenditure on buildings to which the transitional measures contained in section 409A(5) apply and expenditure on buildings to which the transitional measures contained in section 409B(4) apply (for this purpose expenditure on the buildings referred to in both paragraph (a) and (b) of section 409B(4) is included). Also included is capital expenditure on hotels above a certain standard located in counties Cavan, Donegal, Leitrim, Mayo, Monaghan, Roscommon and Sligo with the exception of such hotels located in designated seaside resorts in those counties.

“specified deduction” is any of the further deductions allowed in respect of rent provided for in the various provisions giving the “double rent allowance” and listed in the definition. The reference is to the further deduction (generally referred to in the provisions concerned as the “second-mentioned deduction”) to be allowed in respect of rent. The reference is not to be read as including the original deduction in respect of rent (generally referred to as the “first-mentioned deduction” in the provisions concerned).

“specified individual” identifies the type of individual to whom the transitional provisions apply. The individuals concerned are individuals who are limited partners only by reference to paragraph (d) of the definition of “limited partner”. In other words, only individuals who carry on a trade or profession as a general partner in a partnership other than as an active partner. An active partner is a partner who works for the greater part of the time on the day-to-day management or conduct of the trade or profession carried on by the partnership. The transitional provisions cannot, therefore, apply to any other type of individual or any other person who is a limited partner by virtue of any other provision of the definition of “limited partner”.

Trades eligible for transitional relief

(2C)(c) A specified individual whose partnership trade consists wholly of the leasing of plant or machinery to a company which is a qualifying company within the meaning of section 486B.

The company must be incorporated in the State, be resident in the State without being resident elsewhere and must exist solely for the purposes of undertaking a renewable energy project for which the Minister for Public Enterprise has given the appropriate certificate, which certificate has not been revoked. To qualify under this provision the expenditure on the plant and machinery must have been incurred under an obligation entered into between the lessor and the lessee before 1 March 2001.

(2C)(d) A specified individual to whom an accelerated capital allowance under section 284(3A) is made in charging the profits or gains of that individual’s several trade where he/she is a specified individual in relation to that partnership.

The allowance under section 284(3A) is an allowance in respect of expenditure on machinery or plant consisting of a sea fishing boat registered in the Register of Fishing Boats where the expenditure is incurred in the period 4 September 1998 to 3 September 2001 provided the expenditure is certified by Bord Iascaigh Mhara as incurred for the purposes of fleet renewal in the polyvalent and beam trawl segments of the fishing fleet. The transitional measures for this class of individual, only applies to such an individual for interest incurred on a loan taken out before 4 September 2000; capital allowances for expenditure incurred before that date; and losses incurred in the individual’s trade up to the year of assessment 2002. However, losses for later years are not to be subject to the restrictions to the extent that the loss arises from the taking into account of capital allowances made under section 284(3A).

It is to be noted that the transitional measures also applies to individual’s who are partners in a trade of leasing such fishing boats. It is by reference to the cut-off date (that is, 3 September 2000) for the availability of these capital allowances for set-off against other income in the case of an individual lessor as set out in section 403(5A) that the transitional measures are ended. This gives rise to a difference between the ending of the transitional measure and the ending of the accelerated allowances generally.

(2C)(e) A specified individual where a double rent deduction is allowed to the partnership trade in respect of a premises occupied by the partnership for the purposes of the partnership trade.

This is, however, subject to a number of conditions. These conditions are that —

• the individual joined the partnership before 29 February 2000,
• the individual made a contribution to the partnership trade before that date, and
• the qualifying lease for which the double rent deduction is allowed was granted to or acquired by the partnership before that date.

(2C)(e)(I) Where a double rent deduction (for a premises in an area other than a seaside resort area) is not allowed to a partnership and this is reflected in arriving at the profits or gains of the individual’s several trade for any year of assessment, the transitional measures will no longer apply to that individual in respect of that trade for interest paid in that year of assessment; allowances to be made for that year; and losses sustained in the trade in that year and subsequent years.

(2C)(e)(II) However, where a double rent deduction is allowed to a partnership for a premises occupied in a seaside resort area, the transitional measures will cease to apply to an individual who is a specified individual in relation to that partnership for interest paid by that individual after 1 January 2005; allowances made for the year of assessment 2005 and subsequent years; and losses sustained in the year 2005 and subsequent years.

Transitional relief

(2C)(b)(i) The restrictions provided for by this section do not apply in respect of a specified individual where that individual is engaged in particular trades as set out above. The restrictions are only lifted to the extent that interest paid by the individual, capital allowances made to the individual and losses allowed to the individual are referable to or arise from that individual’s participation in one or other of these partnership trades.

(2C)(b)(ii) The restrictions in respect of a specified individual do not apply to the extent that interest paid by the individual, capital allowances made to the individual and losses allowed to the individual are referable to excepted expenditure.

Relevant Date: Finance Act 2021