80 Taxation of certain foreign currencies

Summary

This section provides that a foreign currency exchange gain/loss arising to a company on a high coupon “section 130” loan denominated in a foreign currency is treated as a profit or gain or a loss, as the case may be, of the borrower’s trade. By virtue of section 443(18), gains/losses treated by this section as profits/gains of the trade carried on by a company where they arise to a company whose trade qualifies for manufacturing relief are regarded as amounts receivable from the sale of goods and, accordingly, taxed at the 10 per cent corporation tax rate rather than at the standard rate of corporation tax or at the capital gains tax rate.

A “section 130” loan is a loan structured in such a way that, under the Corporation Tax Acts, the interest payable on the loan is regarded as a distribution of profits rather than an expense of the trade. As a result, the interest is not allowable for tax purposes in the case of the borrower and is not taxable in the hands of the lender. The funding costs of the lender, however, are available for off-set against the lender’s other income. The tax advantage which the lender has in these circumstances is then shared with the borrower by way of lower interest rates. Over time these loans were developed so as to achieve even lower net interest rates. This was achieved by borrowing in high interest rate countries. The high rates of interest were offset by foreign exchange gains made by the borrower by forward-buying the currency needed to repay the loan and the interest on the loan. The correct tax treatment of such exchange gains was, before this section, unclear. In order to remove any ambiguity, and as certain approved borrowers involved in new manufacturing projects had been given undertakings that high coupon “section 130” loans would be available, this section provides that such exchange gains/losses are to be treated as profit/losses of the borrower’s trade. By virtue of section 443(18), such profits are regarded as an amount receivable from the sale of goods and, accordingly, qualify for the 10 per cent rate of corporation tax.

Details

(1) “relevant liability” is relevant principal (that is, “section 130” funding) denominated in a foreign currency the interest rate on which exceeds 80 per cent of a specified rate; in other words it is a high coupon “section 130” foreign currency loan.

“relevant principal” is “section 130” funding (that is, money advanced to a borrower by a lender whose trading activities include the lending of money and where the interest on the loan is, by virtue of subparagraph (ii), (iii)(I) or (v) of section 130(2)(d), regarded as a distribution). This definition is to be distinguished from the similar definition in section 133. This definition is designed to include foreign sourced “section 130” loans as well as Irish sourced loans. Section 133 on the other hand is concerned with limiting the Exchequer cost of “section 130” lending. For this reason it does not address foreign sourced “section 130” loans as these do not impose any cost on the Exchequer. The restrictions in section 133 apply to Irish sourced loans and the definition of “relevant principal” in that section is, therefore, a narrow one. This section relaxes the tax treatment of exchange gains relating to “section 130” loans and, therefore, includes in its scope all loans, both Irish and foreign sourced.

“specified rate” is the “3 month European Interbank Offered Rate”.

(2) A profit or loss arising from a foreign exchange transaction connected with a “section 130” loan which, as respects a particular accounting period, is a high coupon “section 130” loan is deemed to be a profit or loss of the borrower’s trade for which the “section 130” loan is used.

Relevant Date: Finance Act 2019