133 Limitation on meaning of “distribution” – general

Summary

In general, interest paid by a company is tax deductible in computing the company’s income. To counter the possibility of equity and distributions being dressed up as loans and interest so that the interest would be tax deductible, certain interest is treated for corporation tax purposes as being a distribution (see section 130). These have been generally known as “section 84” loans. (In the context of the Taxes Consolidation Act, 1997 the corresponding section is section 130 and the reader should be aware of the possibility of such loans being referred to as “section 130” loans – where necessary in these notes the reference used is “section 130”). The result is that the interest is not tax deductible in the case of the borrower and is an exempt distribution in the hands of the recipient. In order to prevent misuse of that provision, section 133 limits the circumstances in which the interest can be treated as an exempt distribution in the hands of the “lender”.

Details

Definitions and construction

(1)(a) The meaning of “agricultural society” and “fishing society” are set out. Such societies must have a certain minimum number of members a majority of whom are engaged in husbandry or fishing, as the case may be.

“relevant principal”, the term used to describe the principal advanced in a loan covered by the section, must be money for which the borrower has given a security which is a “relevant security”. The interest or other form of distribution must be paid by the borrower in respect of a “relevant security”. A “relevant security” is a security within the meaning of certain paragraphs of section 130(2)(d). The lender of a “relevant security” must be a company the ordinary trading activities of which include the lending of money. Thus, in such cases, the interest must be on a loan from a bank or other financial institution.

“selling by wholesale” includes not only sales of goods for re-sale, but also goods sold for use in a trade or undertaking.

“specified trade” is a trade which consists wholly or mainly of the manufacture of goods (within the ordinary meaning of that term).

(1)(b) “specified trade” includes certain trades carried on by 75 per cent subsidiaries of agricultural or fishery co-operatives. The trades concerned include trades consisting of the selling by wholesale of agricultural products and fish, as appropriate.

(1)(c) A trade is regarded as consisting wholly or mainly of particular activities in an accounting period if, in that accounting period, not less than 75 per cent of the total amount receivable from sales made in the course of the trade comes from sales made in the course of those particular activities.

(1)(d) A qualifying shipping trade (as defined in section 407) is not regarded as a specified trade. This applies despite the fact that such a trade qualifies for manufacturing relief.

(1)(da) A certificate referred to in subparagraph (ii) of the definition of “agricultural society” or subparagraph (ii) of the definition of “fishery society” is a certificate given by the Minister for Finance, on the recommendation of the Minister for Agriculture and Food or the Minister for Marine and Natural Resources, which entitled a society to be treated as an agricultural or fishery society, as the case may be.

Certain interest not to be a distribution

(2) Apart from the exceptions certain interest (or other distributions such as a premium on repayment of a loan) paid on or after 12 April, 1989 by a borrowing company to another company which is within the charge to corporation tax is not treated as a distribution. As the other company must be within the charge to Irish corporation tax this provision does not apply to interest (or other distribution) paid to a non-resident company (except where the non-resident company is carrying on a trade in the State through a branch or agency) or to any other person. The effect of this is that the interest (or other distribution) is effectively liable to corporation tax in the hands of the recipient company.

This provision affects interest, etc payable in respect of loans made to the borrower where the interest would otherwise be treated, under certain stated provisions of section 130(2)(d), as a distribution.

The provisions of section 130(2)(d) concerned are —

• subparagraph (ii), which treats interest as a distribution if the security for the loan is convertible into shares;
• subparagraph (iii)(I), which treats interest as a distribution if the level of interest is made dependent on the results of the borrower’s business; and
• subparagraph (v), which treats interest as a distribution where the security for a loan is tied to the holding by the lender of some shares in the borrowing company.

Exceptions

The rule in subsection (2), under which interest (or other distribution) is not to be treated as a distribution, does not apply in certain circumstances. These are —

• Foreign owned lenders
  (3) Where the principal has been advanced out of share capital which is beneficially owned (directly or indirectly) by one or more persons resident outside of the State.
• More than a reasonable commercial return
  (4) Where the interest (that is, the consideration given) on the loan represents more than a reasonable commercial return on the loan. In this case, however, the amount of interest which does represent a reasonable commercial return will not be treated as a distribution. This is intended to ensure the effectiveness of the anti-avoidance measure of section 130 against excessive interest paid on loans.
• Specified trades
  (5) Where the borrower carries on a specified trade in the accounting period concerned, the interest would otherwise be a trading expense of that trade and the relevant principal is used for the purposes of a trade —
  • of manufacturing or deemed manufacturing (other than certified Shannon service activities) activities, or
  • if the trade concerned is carried on by a subsidiary of an agricultural or fishing society, of the selling by wholesale of agricultural products or fish.

This, however, is subject to restrictions on new lenders and on the overall volume of interest which may be treated as a distribution under the provisions.

Restriction on new lenders

(6) The exceptional treatment afforded to interest paid by companies in respect of specified trades does not apply in respect of interest paid after 12 April, 1989 to a lending company which, at that date, had no outstanding relevant principal.

Restrictions on overall volume of interest which may be treated as a distribution

• Loans made after 12 April, 1989
  (7) From 12 April, 1989 only interest related to relevant principal up to 110 per cent of the amount of such principal advanced (that is, actually drawn down by borrowers) by a lender on that date is recognised as a distribution in its hands. Interest received by the lender which relates to an excess of relevant principal over the 110 per cent ceiling is not an exempt distribution in its hands and is taxable on the lender as interest. The payment continues to be treated as a distribution made in the case of the borrower.
• Loans made after 30 January, 1990
  (8)(b) A reduced ceiling on the amount of interest which qualifies as a distribution was introduced from 31 January, 1990. From that date only interest related to relevant principal up to 75 per cent of the amount of such principal advanced by a company on 12 April, 1989 is recognised as a distribution in its hands. All interest received by a lending company which relates to an excess of principal over the 75 per cent ceiling is not an exempt distribution in its hands and is taxable on the lender as interest. The payment continues to be treated as a distribution made in the case of the borrower.
  (8)(c) Under transitional arrangements, interest received by a company on foot of loans made by it after 30 January, 1990 which would not otherwise qualify as a distribution (because the total amount of the lender’s relevant loans exceeds the 75 per cent ceiling) does qualify as a distribution if certain conditions are met. The conditions are —
  • the borrower was in negotiation in relation to such a loan with a lender before 31 January, 1990,
  • the borrower had received before 31 January, 1990 a written offer of grant aid from the IDA, SFADCo or Údarás na Gaeltachta in respect of a specified trade for which the loan is made,
  • the specified trade of the borrower is a new manufacturing project which started to be carried on since 31 January, 1990 or an existing manufacturing project committed to the creation of further employment under a business plan approved by the IDA, SFADCo or Údarás na Gaeltachta,
  • the borrower’s specified trade was included before 25 March, 1992 in a list prepared by the IDA and approved before that date by the Minister for Finance and the Minister for Industry and Commerce (the list had to specify the amount of funding considered to be essential for the success of the trade),
  • the borrower or a company connected with the borrower did not carry on, or intend to carry on, IFSC trading operations after 20 April, 1990,
  
  An overall limit of €215,855,473.33 is placed on the amount of loans available under these transitional arrangements as between all the companies which satisfy the conditions as set out above. Any interest on loans above this total does not qualify as a distribution in the hands of the lender.
• Loans made after 20 December, 1991
  (9)(a) The 75 per cent ceiling on relevant principal mentioned above was reduced to 40 per cent as respects loans made after 31 December, 1991. From that time only interest related to relevant principal up to 40 per cent of the amount of such principal advanced by a company on 12 April, 1989 is recognised as a distribution in the lender’s hands. All interest received by a company which relates to an excess of principal over the 40 per cent limit is not an exempt distribution in the lender’s hands and is taxable as interest. The payment continues to be treated as a distribution made in the case of the borrower.
  (10)(a) The 40 per cent ceiling was reduced before 31 December, 1991 to zero as respects loans made from 20 December, 1991. From that date, interest on relevant principal advanced on or after 20 December, 1991 is not recognised as a distribution in the hands of the lender and is taxed as interest. Again, the payment continues to be treated as a distribution made in the case of the borrower.
  (9)(b)(ii) The 40 per cent ceiling had effect earlier than 31 December, 1991 in the case of a lender to whom an amount of relevant principal was repaid by a non-manufacturing company in the Shannon Airport Zone. If an amount of loan was repaid by such a company before 31 December, 1991, the 40 per cent ceiling applied to the lender from the date of that repayment. In addition, if at any time after that date the balance of relevant principal outstanding fell below the 40 per cent ceiling, the amount of loans outstanding is to be substituted for the 40 per cent ceiling.
  (9)(c)(i) & (10)(b)(i) Under transitional arrangements, interest received by a company on foot of loans made by it after 20 December, 1991 which would not otherwise qualify as a distribution (because the total amount of the company’s relevant loans exceeds the 40 per cent or zero ceiling as outlined above) qualifies as a distribution if certain conditions are met. These are —
  • the specified trade of the borrower is a new manufacturing project which started to be carried on after 31 January, 1990 or an existing manufacturing project committed to the creation of further employment under a business plan approved by the IDA, SFADCo or Údarás na Gaeltachta,
  • (9)(c)(ii) & (10)(b)(ii) the borrower’s specified trade was included before 25 March, 1992 in a list prepared by the IDA and approved before that date by the Minister for Finance and the Minister for Industry and Commerce,
  • (9)(c)(iii) & (10)(b)(iii) the borrower (or in the case of the 40 per cent ceiling a company connected with the borrower) did not carry on, or intend to carry on, IFSC trading operations after 20 April, 1990.

(11) An overall limit was placed on the amount of loans available (under the 40 per cent or zero ceilings) as between all the companies which satisfy the conditions as set out above. Any interest on loans above this total does not qualify as a distribution in the hands of the lender. The overall limit is the aggregate of €317,437,519.61 and the balance of the €215,855,473.33 list mentioned above which had not been advanced by 31 December, 1991.

Miscellaneous rules

For the purposes of the various ceilings set out above and the exceptions to those ceilings —

• (8)(d)(i) a loan is regarded as made at the time of the advance rather than at the time of entering into the loan agreement,
• (8)(d)(ii) any extension of the loan period is regarded as involving repayment of the loan at the scheduled repayment date and the making of a new loan,
• (8)(d)(iii) the amount specified on the IDA list in relation to a project is to be reduced when any amount is advanced to the borrower concerned,
• (12) transitional rules apply where before 7 December, 1993 a loan was repaid prematurely and was replaced by one or more further loans,
• (8)(e) the assignment by a lender of rights or obligations under a loan agreement in relation to relevant principal is ignored.

Time limit on certain loans

(8)(a) A limit of 7 years applies to the period in which interest on relevant principal advanced after 11 April, 1994 may be treated as a distribution. Interest on advances on or before that date are not to be treated as a distribution after 11 April, 2001.

High Coupon Loans

(13)(b) High coupon loans are loans denominated in a foreign currency and on which a high rate of interest is charged. If such loans were structured so as to be within the scope of section 130 and in the absence of legislation, the interest would not be deductible in computing the income of the borrower and would not be taxable in the hands of the lender. This could result in a significant saving where the borrower was taxed at 10 per cent and the lender was taxed at the standard corporation tax rate. The saving was maximised where high rates of interest were charged. The high funding costs could be used by the lender to offset other income accruing to it. It was possible for the borrower to mitigate the real funding cost by entering into currency swap arrangements.

Interest on high coupon loans is not regarded as a distribution in the hands of the lender if the rate of interest on the loan exceeds 80 per cent of the 3 month European Interbank Offered Rate (EURIBOR). Interest on such loans is taxable in the hands of the lender. However, interest on a high coupon loan may be treated as a distribution in any of the following circumstances —

• (13)(c)(i) if the loan was advanced before 30 January, 1991 and carried an interest rate higher than 80 per cent of EURIBOR but this applies only for so long as the interest rate on the loan does not exceed the rate which would have applied if the loan were denominated in the currency in which it had been denominated on 30 January, 1991,
• (13)(c)(ii) to (iv) if the loan was advanced after 29 January, 1991, the relevant principal is listed in the IDA list of projects mentioned in the exceptions to the ceilings and the borrower had received an undertaking that interest on the loan would be treated as a distribution. However, for the interest to be treated as a distribution the interest rate cannot exceed —
  • the rate which would have applied if the loan were denominated in the currency in which it was denominated at the time it was advanced (only applies to loans advanced between 30 January, 1991 and 20 December, 1991), or
  • a rate approved by the Minister for Finance in consultation with the Minister of Enterprise, Trade and Employment,
• if the loan is denominated in sterling, or
• if the borrower is a non-manufacturing company trading in Shannon.

Relevant Date: Finance Act 2019