A recent decision of the Tax Appeals Commission (TAC) concerned a successful appeal by a taxpayer against an assessment to corporation tax of c.€25m for the year ended 31 December 2013. The Revenue Commissioners (Revenue) raised the assessment on the basis that the proceeds from a waiver of an intercompany loan constituted profits or gains of the Appellant’s trade and was a taxable receipt for corporation tax purposes.
The Appellant successfully appealed Revenue’s assessment, arguing that the loan was capital in nature and that the waiver of the loan was a capital transaction and did not give rise to corporation tax.
The Appellant was an Irish incorporated and tax resident treasury company of a multinational group. The material time was between 2011, when the Appellant developed its role as a treasury company providing cash pooling and lending services to other group companies, and 2013, when the intercompany debt, a c.$265m intercompany loan (Loan), was waived.
The Loan waiver resulted in an equivalent gain for the Appellant, which was reported as “non-operating income” in its profit and loss statement and as “non-taxable capital gain” in its corporation tax computation. Revenue raised an assessment regarding the entire sum, equivalent to c.€200m, as taxable income and subject to tax at the standard 12.5% rate. This resulted in a c.€25m corporation tax bill.
The Appellant submitted that the Loan was fixed capital used in the business to fund the Appellant’s loan book, from which the Appellant derived income in the form of interest. The Appellant argued that the waiver of a fixed capital type loan does not typically arise in the ordinary course of a treasury trade, and the transaction should not be taxed as a trading receipt.
Revenue submitted that the Loan waiver arose as part of the Appellant’s trade of treasury services, was not capital in nature and was taxable as schedule D case 1 income arising in 2013. Revenue submitted that the waiver generated a profit that was distributed by a dividend.
Revenue argued that section 76A Taxes Consolidation Act 1997 (TCA) established the basic rule that taxable trading profits of a company will be based on the profits according to the company’s financial statements and that the Appellant had not established a basis for excluding the non-operating income of c.$265m.
The Appellant argued that the waiver of the Loan was not part of the “profits or gains of the trade” and as such, did not come within the scope of section 76A TCA. The Appellant argued that the Loan was a capital item, and the waiver was a capital advance to the Appellant.
Numerous authorities on the distinction between revenue and capital were cited. The TAC concluded that the case turned on its own facts but identified the following legal principles to be applied:
- Purpose: The Loan was “to maintain the capital structure of the company and to ensure that it had sufficient capital funding in place to enable it to conduct its treasury activities”.
- Duration: Revenue argued that the Loan was repayable on demand, and this mitigated against it being capital in nature. Although the Loan was repayable on demand, there was no expectation that the Loan would be called in. The Loan existed on the Appellant’s balance sheet for almost two years prior to the waiver.
- Temporary or fluctuating? The Loan was neither. The amount owed remaining unchanged throughout. Formal assurance was given that it would not be repayable on demand which was reflected in a note in the financial statements.
- Quantum: At US$264,991,232, the Loan was the largest on the Appellant’s loan book, and substantially funded the Appellant’s loan book.
- Capacity to repay: The Appellant could not repay the Loan without a capital injection.
- Net asset accretion: The Loan waiver helped strengthen the company’s balance sheet, which assisted the Appellant to obtain credit from its bank lenders afterwards.
- Non-recurring item: The waiver of the Loan arose as part of a group reorganisation and was an exceptional item. As such, the waiver was non-recurring in nature.
- Fixed in amount and permanent in nature: The indebtedness associated with the Loan was removed permanently, and the company’s assets increased accordingly.
The TAC stated that it was clear from the evidence that the Loan was loan capital used to fund the Appellant’s loan book to generate profit in the form of interest. The TAC was satisfied that the Loan was integral to the Appellant’s profit-making apparatus and capital structure. The TAC determined that the Loan waiver did not constitute profits or gains of the trade and was not a taxable receipt for corporation tax purposes (Determination).
The TAC noted that Revenue’s submissions failed to elaborate on how the character of the Loan was converted from capital to a taxable revenue receipt through the loan waiver; “The answer in short is that it was not” concluded the TAC.
Revenue has not appealed the decision. A link to the decision is available here 52TACD2022
The Determination confirms the tax treatment of intercompany debt waivers when used to fund a treasury company’s loan book. It also reinforces that Ireland is an attractive location to carry out treasury and cash pooling activities.
Please contact Brian Duffy or Anne Tobin or your usual William Fry contact if you have any queries in relation to the decision or if you wish to discuss the tax implications of a waiver of an intercompany loan.
Contributed by Deirdre Kirwan & Robert Kearns