Paul Foley Solicitors :: Investing in Ireland

A company is in general, entitled to deductions in respect of revenue expenditure, wholly and exclusively incurred for the purposes of its trade against its profits. It is not however entitled to claim a deduction in respect of capital expenditure, unless the asset qualifies for capital allowances ¹.

Expenditure which is wholly and exclusively laid out for the purposes of a company's trade or profession in a 3 year period before commencement of trading, is allowed as a deduction in calculating the profits of the company following commencement.

Subject to some exceptions, interest on borrowings ( other than interest treated as a distribution ) used for the purposes of trading activity is deductible. Interest on borrowing, where the borrowings are used for certain non trading purposes such as to acquire shares in other companies, may be deductible.

The Finance Act 2006 restricts the reliefs where the borrowed money is used for a related party transaction. For example, the relief does not apply when interest is paid by the investing company on a loan made to it by a company which is connected with it, where the loan is used to acquire ordinary share capital of a company that is also connected with the investing company or to on-lend to another company, which uses the funds directly or indirectly to acquire capital of a company that is connected with the investing company. There are a number of exceptions to this new section, where for example, the loan is used to acquire shares, where the share capital is used to increase the capital available to the company for use in its trade or business. These provisions the Minister indicated are designed to prevent related party transactions that are designed to generate tax relief in an artificial manner.

Trading losses may only be offset against trading income for the same and immediately preceeding accounting period on a euro for euro basis. Any unused trading loss may be offset against non trading income including chargeable gains, but only on a value basis.

Losses of a company on non-development land assets may be offset against chargeable gains, other than development land gains of that company, only in the current accounting period and any unused balance can be carried forward. Losses on the disposal of development land can however be offset against gains arising on other assets.

In very broad terms, members of a group² may surrender current year trading losses, excess charges on income, excess management expenses ( in the case of investment companies ) and certain excess capital allowances

Group members must be resident in the State or an EU member state for accounting periods after 1.7.98. For any accounting period, 2 or more group members may make a claim in respect of loss/ deficiency of a third member of a group. Capital losses cannot be surrendered within a group.

1 One can claim capital allowances on the net (ie less VAT and any grants) capital expenditure incurred on items such as office equipment, business plant and machinery (including software), vehicles and certain buildings (for example industrial buildings) . Capital allowances are calculated on a straight line basis at 4% on Industrial Buildings and 12.5% on plant and machinery.

2 Two companies are members of a group if one is a 75% subsidiary of the other or both are 75% subsidiaries of a third company. Note that a company is a 75% subsidiary of another company where not less than 75% of the ordinary share capital is owned directly/indirectly by that company. Also the parent company must be entitled to 75% of profits available for distribution to equity holders ( includes loan creditors ) and to 75% of assets available for distribution to equity holders on a winding up.

INVESTING IN IRELAND