Intercompany investment/loan..tax implications

[Firefly]

Hi all,

Mrs Firefly has formed a new company (healthcare) and is planning to start this autumn & will require approx 10k initial investment in equipment. Mrs F is a 50% shareholder & director in my company (software) and I in hers. Rather than taking 10k out of my company in salary (and paying PAYE/PRSI, only to employ this capital into the new company) is it possible for my company to make a loan/investment in the new company from current earnings? Would this be tax deductable?

Thanks,
F

 

[mandelbrot]

Hi all,

Mrs Firefly has formed a new company (healthcare) and is planning to start this autumn & will require approx 10k initial investment in equipment. Mrs F is a 50% shareholder & director in my company (software) and I in hers. Rather than taking 10k out of my company in salary (and paying PAYE/PRSI, only to employ this capital into the new company) is it possible for my company to make a loan/investment in the new company from current earnings? Would this be tax deductable?

Thanks,
F

Hi Firefly,

Simple answer is no, it's not possible to just make a loan, unless the 10k would represent less than 10% of the net assets of your company. More so for company law reasons than tax reasons initially. Have a look at the following:

http://www.askaboutmoney.com/showthread.php?t=117928



As for tax implications, if you are allowed under company law to make a loan, the loan would be a loan by a close company to / for the benefit of a participator or an associate of a participator. Your company would be obliged to gross-up the loan, and pay over 20/80 of the amount as a withholding tax. So in your case, 10k x 20/80 = 2.5k in tax. This is paid as/with corporation tax on the CT1. As soon as the loan is repaid, then the company that made the loan/paid the tax, can claim a repayment in full. This 2.5k is NOT tax deductible.

A secondary tax issue, often overlooked, is that unless the company that made the loan is charging / receiving interest, then there will be a BIK issue, i.e. the company will be obliged to account for a notional benefit to the director of 10k @ 12.5%, so PAYE/PRSI/USC on 1,250 would also be due. I'm not sure about the deductibility of this 1,250 for Corp Tax purposes (and its too late to go looking!), but the PAYE/PRSI/USC themselves would be deductible.

Hope that all makes sense,
Regards,
B

 

[Firefly]

Thanks for that Mandelbro. I'll be talking with my accountant soon but it's good to have some info to digest first.

F.