What are the company law and tax implications of a loan from CO. & CO. B to Co C where C is owned by the shareholders in A & B?

Question:

Company A and Company B each own 50% shares in Company C.

Company A is owned 100% by Director A and he is the sole Director of Company A. Company B is owned 100% by Director B and he is the sole Director of Company B.

Director A and Director B are the two Directors of Company C.

Companies A and B are personal holding companies of a trading company and receive Dividends from the trading company (through another holding company). Companies A and B own 40% and 20% respectively of another holding company which owns the trading company 100%.

So Company A and B have cash. They have loaned Monies to Company C (Company A has loaned €200K and B has loaned €75K). They have loaned the amounts over time since late 2017. Company C buys Classic Cars and holds them for re sale with the assumption that the values will rise. Company C has not sold any cars yet and the only income it has is a small amount of rental income from cars it has rented out.

 

What are the Company law implications of the loans from Company A and Company B to Company C (no loan agreement is in place)?
What are the tax implications of the loans from A and B to C?

Answer:

1. What are the Company law implications of the loans from Company A and Company B to Company C (no loan agreement is in place)

Assuming there are no outside contracts such as shareholders agreements or a share class(es) that is giving Co A or Co B control over the board the situation outlines does not meet the requirements of a Group under section 7 CA2014. Section 239 CA 2014 applies where there is a loan to a director or their connected persons and Section 220 CA 2014 states that a body corporate is connected where the director or their connected persons own 50% or more of the share capital of the other company. Each loan will need to be reviewed separately here, are the loans equal to or more than 10% of net assets as per the financial statements as last laid before the AGM during the time the loans were issued then this is an illegal loan.

The loans can only be provided if a summary approval procedure is performed or alternatively a group is created, for example by the creation of a golden share. If you like we can discuss implementing this with you? The other alternative is to issue preference shares (which does mean it would be harder to repay these if there were not sufficient distributable reserves).

2. What are the tax implications of the loans from A and B to C

There are no immediate tax implications. It largely depends on whether interest will be charged.

If so the interest will be treated as income in the hands of Co. A & B. As they are holding companies, we assume that issuing loans is not in their ordinary course of business and therefore will be taxed as investment income at 25%. As I’m sure you are aware, the close company surcharge needs to be considered where the excess investment and estate income in the client company hasn’t been distributed within 18 months of the accounting year end (assuming it is above €2k).

A deduction will be permitted in Co. C where the loan is used wholly and exclusively for the purposes of the trade (where interest is charged). Note interest shoudl not be above market rates.

If there is no interest charged then this will be a deemed gift for Capital Acquisition tax purposes. Under s43 CATCA 2003, a private company as defined under s27 CATCA 2003 is “looked through” when it receives or makes a gift or inheritance. Therefore Director A and Director B will be deemed to be receiving a gift from either other, as you cannot take a gift from yourself, even though it is effectively from and to corporate bodies. Each director is entitled to their annual small gift exemption of €3,000 from each disponer.

However, Revenue normally apply deposit interest rates for CAT purposes, so this may not be a huge issue. Alternatively if the deposit rate of interest was charged there would be no CAT issues.

Note that where interest is charged withholding tax at a rate of 20% will be required to be withheld on interest payments in accordance with Section 239 TCA 1997 and paid over to the revenue with the CT1. The receiving company will get a credit for the tax withheld in its CT1.

As this is a loan between companies then the close company surcharge issues re paying over income tax on the unpaid element of the loan have no application, as long as there is not a plan for the daughters company to give on a loan to the parents.