Technical Update: Tax

Changes to the rules on getting an Irish tax deduction for interest payments

What has happened?
Amid the somewhat chaotic passing of the Finance Act in January 2011, treasurers may have missed a provision that could have significant consequences for the tax deductibility of intra-group interest payments.

When income tax was introduced to Ireland in 1853 one of the main deductions was for interest on borrowings. Originally, all interest payments made by a person or a company were tax deductible. Older readers will recall the days when all mortgage interest could be fully offset against your income tax bill. As with mortgage interest, the tax treatment of the interest that companies pay has been significantly eroded.

In the past these restrictions have tended to focus on non-trading interest (so called, ‘interest as a charge’ provisions). Treasurers will be familiar with the requirements to obtain an interest deduction where their companies are buying new subsidiaries, for example. (And their rules also changed this year as well – see below.)

However, interest on monies borrowed for trading purposes resulted in no significant tax issues. This view has been supported by the Irish Courts in the Ringmahon case (2001). This has now changed with the Finance Act 2011. As would be expected when anyone tries to change over 150 years of tax and commercial practice, the legislation, although short, will have significant unforeseen and complex consequences for all Irish operations and for treasurers in particular. Some clarification has, however, flowed from a Revenue eBrief (11/11) that issued on 15 February.

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This members’ update is for general information only and should not be regarded as a substitute for tax, legal or other professional advice. Such advice should be taken before acting on or taking steps in relation to matters referred to in this document.

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