As a general rule, a full deduction against taxable income is available in Ireland for interest and other financing costs incurred by an Irish incorporated and tax resident corporate borrower in the course of the borrower’s trade. In order for interest and financing costs to be allowed as a deduction in calculating the profits of an Irish incorporated and tax resident trading company, the expense must be of a revenue nature and incurred wholly and exclusively for the purposes of the company’s trade. This applies to both short interest (i.e. interest on a loan for less than one year) and yearly interest. The tax deduction is allowed on an accruals rather than a paid basis.
Where the level of trade interest payable by a borrower exceeds the borrower’s taxable profit from that trade in the particular accounting period so that the borrower incurs a loss, that trading loss may (broadly) be offset against profits and other income, carried back to the preceding accounting period, carried forward indefinitely or surrendered to other members of the Irish corporate tax group. The detailed statutory provisions governing the order in which such losses may be used are outside the scope of this article.
While Ireland is focused on inward investment, there have been a number of recent anti avoidance changes to limit the deducibility of interest, particularly interest as a charge. These are considered further below. However, there are no earnings-stripping measures such as those which have been introduced elsewhere, and despite the changes, the current Irish regime for the deducibility of financing costs still compares very favourably to other jurisdictions.
Anti Avoidance Measures
It is important to note that tax deductions for interest may be disallowed in certain circumstances.
Interest treated as distribution
If interest is paid to a non-resident company that is a 75% affiliate of the Irish borrower, it may be re-characterised as a distribution and will no longer be treated as deductible for tax purposes. However, there are a number of scenarios where this rule is not applied, for example, when the interest is payable to a company resident for tax purposes in an EU Member State, or when the interest is yearly and is paid in the course of the borrower’s trade.
Similarly, if the interest paid is dependent on the results of the Borrower, no deduction is generally available for interest (unless the borrower qualifies under Ireland’s securitisation regime), or if the interest payable exceeds a commercial rate of return for the principal borrowed, the amount by which the interest exceeds a commercial rate will be re-characterised as a distribution and will not be treated as tax deductible.
Connected party transactions
The Irish transfer pricing rules are invoked to limit the deductions available for interest paid to connected companies, if interest payments exceed that which would be agreed between parties acting at arm’s length.
Further, where interest is payable to a connected company on a loan used to acquire assets from another connected company, a deduction for the interest may be denied under certain anti-avoidance provisions.
There is, however, no thin capitalisation rule like that found in most other jurisdictions.
Deductibility of financing costs incurred for non-trading purpose
Where interest and financing costs are not deductible in calculating trading profits but the loan satisfies certain criteria, the interest expense may be treated as a charge on income and deducted from a company’s total profit. In order to qualify for relief as a charge on income, the loan must be used (by the investor company):
to acquire any part of the ordinary share capital of:
- a trading company or a company whose income consists mainly of rental income, or
- a company the business of which consists wholly or mainly of holding stocks, shares or securities in a trading company or a company whose income consists mainly of rental income, or
- to lend money to such a company, or
- to pay off another loan which was applied for either of these purpose
The funds invested must also be used in full by the investee company for business purposes. The investor company must own at least 5% of the ordinary share capital of the investee company (or an associated company). The borrower company and the investee company must have at least one common director. Relief is only available in respect of yearly interest which has actually been paid (and not accrued).
Anti Avoidance Measures
A number of relatively complex anti-avoidance provisions apply to deny relief for interest as a charge. The relief may be denied, for example:
- If the loan is made to the investor company by a connected company and used to acquire shares in a connected company or from a connected company;
- If there is a recovery of capital by the investor company (that is, the loan must not be repaid in any form, except by payment directly against the loan itself); or
If the interest is not actually paid.