Loan of €50,000 from friend

[greeneman]

I have a new business idea. Bank will not lend. But an overseas friend will loan €50,000. We will put a loan agreement in place. I am a sole trader. Are there any tax implications ? I expect to get relief on the interest paid. He will pay tax on the interest earned. What is the best way to structure this ? We want to keep it simple. Any advice appreciated.

 

[onq]

There may be tax efficient ways for him to offer you to money.

If you set yourself up as a research company there may be tax breaks and grants available as well as means to accept the funding which is tax efficient for all concerned.

You both need to see tax experts in your respective jurisdictions.

 

[mandelbrot]

There may be tax efficient ways for him to offer you to money.

If you set yourself up as a research company there may be tax breaks and grants available as well as means to accept the funding which is tax efficient for all concerned.

You both need to see tax experts in your respective jurisdictions.

What do you mean by "if you set yourself up as a research company"??

Would you lend someone 50k to do research, which by definition would be unlikely to be fruitful? (OP says he has a business idea, which would normally mean he believes he has a viable business that will generate a return on the 50k he proposes to borrow. The fact that he has someone willing to lend him 50k would suggest that this is the case.)

And whatever about lending it to an individual, whom you could pursue personally for the debt, how would you feel about lending it to a company, which could blow the 50k on "research" and be in the wind?

What tax breaks and grants are you talking about?

How much do you reckon getting the advice of tax experts in two juridictions is likely to cost, relative to the savings likely to be generated on a relatively modest investment / return?

 

[JoeRoberts]

Depending on the country your friend lives in, you may be required to deduct witholding tax from the interest. He would then have to reclaim it from Irish revenue at the end of the year.
Check with Revenue (the Nenagh office if I remember correctly) , there are different tax treaties with various countries. They will tell you what you need to do.

 

[onq]

This is all going on memory from about two decades ago so that is why I say seek expert advice.

There used to be a company set up in Dublin to promote starter businesses.
The CEO wanted to be able to accept donations in a tax efficient way.

He registered it as a research institute as opposed to a charity.
There was a tax break at the time for people who covenanted.
Three years was the covenant term and 50% the tax break.
The company had to product a learned report to qualify.

Similarly there may be still grants available for start ups.

He asked himself the primary question - "who would know how to do this tax efficiently?"
After that he was guided to a knowledgeable person who advised him correctly.
This is the principle I am invoking - don't just assume one course of action.
Get advice on the best course of action.

BTW, the CEO asked the Revenue.
It cost him nothing.

 

[T McGibney]

There used to be a company set up in Dublin to promote starter businesses.
The CEO wanted to be able to accept donations in a tax efficient way.

He registered it as a research institute as opposed to a charity.
There was a tax break at the time for people who covenanted.
Three years was the covenant term and 50% the tax break.
The company had to product a learned report to qualify.

Sounds like a scam.

 

[kennyb3]

This is all going on memory from about two decades ago

Seriously? When are the moderators going to pull this?. 3 accountants have now rubbished your post.

so that is why I say seek expert advice.

You're happy to bash out advice, yet say this. Do you think this exonerates you of responsibility?

If you don't know why post?

 

[mandelbrot]

This is all going on memory from about two decades ago so that is why I say seek expert advice.

So in other words, you don't really have a clue what you're talking about?

There used to be a company set up in Dublin to promote starter businesses.

That is not the case here. The OP wants a loan to set up a starter business.

The CEO wanted to be able to accept donations in a tax efficient way. He registered it as a research institute as opposed to a charity.

Again, not relevant here. No-one is donating anything.

There was a tax break at the time for people who covenanted.
Three years was the covenant term and 50% the tax break.
The company had to product a learned report to qualify.

There still is such a tax break ([broken link removed]). It is limited to 5% of total income of the individual. In this instance since the individual is "overseas" it is i) unlikely that they are within the charge to Irish tax, or ii) if they are taxable to some extent in Ireland, unlikely they have Irish taxable income of €1m which would be required to obtain full relief.

None of which is relevant however, as the situation you've outlined (people donating money to a research institute) bears no resemblance to the case at hand (a starter business looking for a working capital loan to commence trading). By definition people who donate money don't get anything in return and don't get anything back at all, in monetary terms. Was this not the case with the donors to the research institute you're talking about?

Any attempt to engineer a situation, where the form of the transactions would attempt to obscure the true nature would be a tax avoidance scheme, and liable to be viewed in a dim light by Revenue.

Similarly there may be still grants available for start ups.

Not my area of expertise, but depending on the type of business there may well be. OP should talk to his local Enterprise Board, Chamber of Commerce or Enterprise Ireland, where people with the expertise can point him in the right direction.

He asked himself the primary question - "who would know how to do this tax efficiently?"
After that he was guided to a knowledgeable person who advised him correctly.

Who was the knowledgeable person? (You surely aren't talking about yourself )

This is the principle I am invoking - don't just assume one course of action.
Get advice on the best course of action.

You've managed to completely over-complicate this.
The guy wants a loan Onq.
He's been to the bank and they won't give it to him.
He's found a counterparty who is willing to give him a loan.
What you're "invoking" wouldn't work (tax avoidance - trying to obscure the true substance of the transaction), but even if it would, it would cost more than the benefit, on a loan of €50k. Setting up structures as you've described costs money (and requires the use of "experts" who will require to be handsomely remunerated!)
Say the interest on the loan is 12% p.a. and it is repaid over 7 years, that would be total interest of just under €23k, just over €3k p.a.
Assuming high rate Irish tax applies (which as I've already mentioned may not be the case), the potential tax saving is roughly €1,500 p.a.
How much would it cost to keep a "research institute" tax/CRO compliant for 7 years...

BTW, the CEO asked the Revenue.
It cost him nothing.

That's about the most sensible thing you have said, as they will not entertain what you have suggested, thereby saving him the need to pay to have an "expert" tell him the simple fact: The tax efficient way to get a loan, is to get a loan...

 

[greeneman]

I am the original poster on this. Thank you all for your inputs on this. I intend to do a schedule of repayments capital and interest. I will claim the interst as a business expense. My lender in the USA can declare the interest received from me as income received from abroad. That will be his problem.
I want to do the tranaction in USD so he does not have FX risk. I will take that risk. I hope to do a purchase of USD forwards to meet the schedule of repayments. I bet the banks are closed for that too. Therefore I think I am stuck with the FX exposure. Thanks everyone.