Finance Act 2006

Amendment of section 247 (relief to companies on loans applied in acquiring interest in other companies) of Principal Act.

65.— (1) Section 247 of the Principal Act is amended—

(a) in subsection (1)(b) by inserting “, except for the purposes of subsection (4A),” after “section 10 and”, and

(b) by inserting the following after subsection (4):

“(4A) (a) Subject to the following paragraphs of this subsection, subsection (2) shall not apply to a loan to the investing company to defray money applied—

(i) in acquiring any part of the ordinary share capital of, or

(ii) in lending to a company money which is used directly or indirectly for the purposes of acquiring any part of the capital of,

a company (from such company or another company, being in either case a company which, at the time of the acquiring of the capital or immediately after that time, was connected with the investing company) if the loan is made to the investing company by a person who is connected with the investing company.

(b) Where, as a part of, or in connection with, any scheme or arrangement for the making of a loan to the investing company by a person (in this paragraph referred to as the ‘first-mentioned person’) who is not connected with the investing company, another person who is connected with the investing company directly or indirectly makes a loan to, a deposit with, or otherwise provides funds to the first-mentioned person or to a person who is connected with the first-mentioned person, then the loan made to the investing company shall be treated for the purposes of paragraph (a) as being a loan made to the investing company by a person with whom it is connected.

(c) Paragraph (a) shall not apply to interest on a loan (in this paragraph referred to as the ‘original loan’) made to a company if—

(i) the original loan is used to defray money applied—

(I) in acquiring ordinary share capital of another company on the issue of the share capital by the other company, or

(II) in lending to a company money which is used directly or indirectly for the purposes of acquiring ordinary share capital of another company on the issue of the share capital by the other company,

and

(ii) the share capital is issued for the purposes of increasing the aggregate of the capital available to the other company for the use by the other company wholly and exclusively for the purposes of its trade or business and not as part of any arrangement or understanding, entered into in connection with the original loan, the purpose or one of the purposes of which is to provide moneys, directly or indirectly—

(I) to the person (referred to in clause (II) as the ‘original lender’) who made the original loan and to thereby achieve directly or indirectly the effective repayment of the original loan or the greater part of it, or

(II) to another person who is connected with the original lender and to thereby achieve a provision of moneys that is, notwithstanding that the moneys are being provided (as part of the arrangement or understanding) to a person other than the original lender, equivalent to the achievement directly or indirectly of the effective repayment, referred to in clause (I), of the original loan or the greater part of it,

at a time before interest ceased to be payable by the investing company in respect of the original loan or such greater part of it.

(d) Where the use, whether direct use (in this paragraph referred to as the ‘direct use’) by the investing company or subsequent indirect use (in this paragraph referred to as the ‘indirect use’) through another company as investee or borrower or through a sequence of companies acting, in turn, as investees or borrowers, of a loan (in this paragraph and paragraph (e) referred to as the ‘original loan’) received by an investing company involves lending or acquisition of shares so that such use results in—

(i) interest (which is not deductible in computing income or profits under any provision of the Corporation Tax Acts by the investing company or any company connected with it) being received in, or being receivable in respect of, an accounting period, so as to be income, or as the case may be an amount credited in computing income, chargeable to corporation tax for that period, or

(ii) dividends or other distributions chargeable to corporation tax being received in an accounting period,

and the interest mentioned in subparagraph (i) is, or the dividends or distributions mentioned in subparagraph (ii) are, income of the investing company or a company connected with the investing company, being income which would not have arisen but for the direct use or indirect use of the original loan, then that income shall be relevant income for the purposes of paragraph (e) and shall be referred to in that paragraph as ‘relevant income’.

(e) If relief for interest paid (in this paragraph referred to as the ‘relevant interest’) by the investing company in an accounting period (in this paragraph referred to as the ‘relevant accounting period’) in respect of the original loan would, apart from this paragraph, be denied by virtue of paragraph (a), relief shall not be denied in respect of so much of the relevant interest as does not exceed the relevant income of the investing company for the relevant accounting period and where—

(i) the relevant interest exceeds the relevant income of the investing company for the relevant accounting period, by an amount referred to in this paragraph as the ‘relevant excess’,

(ii) apart from relief by virtue of an election under subparagraph (iii), relief could not be claimed under the Corporation Tax Acts in respect of the relevant interest represented by the relevant excess,

(iii) the investing company and a company (in this paragraph referred to as the ‘electing company’) connected with it jointly so elect and notify the inspector of that election in such form as the Revenue Commissioners may require, and

(iv) the aggregate value of relevant interest that may be deducted by virtue of elections under subparagraph (iii), by one or more companies other than the investing company, does not exceed the relevant excess,

then so much of the relevant interest represented by the relevant excess may be deducted from the total profits, reduced by any other relief from corporation tax, of the electing company, for the accounting period (in this paragraph referred to as the ‘second-mentioned period’) for which the relevant income of the electing company is chargeable to corporation tax, as does not exceed the lesser of—

(I) the part of the relevant income of the electing company for the second-mentioned period which may be apportioned to the relevant accounting period (by reference to the proportion which the length of the period common to the relevant accounting period and the second-mentioned accounting period bears to the length of the second-mentioned accounting period), and

(II) the amount by which such part of that relevant income of the electing company exceeds the aggregate of any amounts, being—

(A) amounts of any relief, which is referable to the second-mentioned period, surrendered at any time by the electing company under Chapter 5 of Part 12, or

(B) amounts, which are not amounts referred to in clause (A), of any losses which could have been set off under section 396(2) against profits of the second-mentioned period but which were not set off against those profits,

but relief, for interest paid by the investing company, which has been allowed by virtue of this paragraph shall be deemed for the purposes mentioned in Paragraph 4(5) of Schedule 24 to the Principal Act to have been allocated by the company concerned to the relevant income of the company by reference to which the relief for the interest was allowed, and the foreign tax in respect of that relevant income shall be disregarded for the purposes of paragraph 9E and 9F of Schedule 24.

(f) Where, as a part of, or in connection with, any scheme or arrangement for the making of a loan to any company (in this paragraph referred to as the ‘borrower’), which is connected with the investing company, by a person (in this paragraph referred to as the ‘first-mentioned person’) who is not connected with the investing company, another person who is connected with the investing company directly or indirectly makes a loan to, a deposit with, or otherwise provides funds to the first-mentioned person or to a person who is connected with the first-mentioned person, then interest payable by the first-mentioned person to the other person in respect of the loan, deposit or other funds shall be treated for the purposes of paragraph (d)(i) as interest which is deductible in computing income or profits under provisions of the Corporation Tax Acts by the investing company or a company connected with it.

(g) For the purposes of paragraph (e), ‘relevant income’ of a company shall be increased or reduced by any amount of profit or gain or, as the case may be, loss directly related to that income or to the source of that income which is an amount arising—

(i) by virtue of a change in a rate of exchange (within the meaning of section 79), or

(ii) from any contract entered into by the company for the purpose of eliminating or reducing the risk of loss being incurred by the company due to a change in a rate of exchange (within the meaning of section 79) or in a rate of interest.

(h) For the purposes of paragraph (c), share capital shall not be treated as issued by a company as part of an arrangement or understanding of a type described in that paragraph, entered into in connection with an original loan (within the meaning of that paragraph), solely because that share capital is used directly or indirectly in paying off, to the person who made the original loan (within that meaning) or to a person connected with that person, a loan, advance or debt (in this paragraph referred to as the ‘other loan’) other than the original loan where—

(i) the other loan was used wholly and exclusively for the purposes of a trade or business of the company and not as part of any arrangement or understanding, entered into in connection with the other loan, the purpose or one of the purposes of which was to provide moneys, directly or indirectly—

(I) to a person (referred to in clause (II) as the ‘original lender’) who made, or directly or indirectly funded, the other loan and to thereby achieve directly or indirectly the effective repayment of the other loan or the greater part of it, or

(II) to another person who is connected with the original lender and to thereby achieve a provision of moneys that is, notwithstanding that the moneys are being provided (as part of the arrangement or understanding) to a person other than the original lender, equivalent to the achievement directly or indirectly of the effective repayment, referred to in clause (I), of the other loan or the greater part of it,

at a time before interest ceased to be payable by the company in respect of the other loan or such greater part of it, and

(ii) interest on the other loan, if that other loan had been made on or after 2 February 2006, would have been deductible in computing profits, or any description of profits, for the purposes of corporation tax—

(I) if the other loan had not been paid off, and

(II) on the assumption, if the other loan was free of interest, that it carried interest.”.

(2) This section applies as respects a loan made on or after 2 February 2006.