Write off of a Loan to another company

P

Paulmac

Guest
I own two companies for now called CO A and CO B personally and over several years company A has lent small amounts of money across to Company B. Company B has now no money and my accountant is saying that if Company A waives this loan then it will probably be treated as a distribution for company B and it will be subject to surcharges.

Has anyone got some thoughts on this and if possible guide me in the right direction with respect to where i could research more information with reagrds to write offs of inter company loans . Thanks ??
 
Do you own 100% of both companies? One thing to consider if you don't, and there are other partners involved, is that company B could pursue company A through the courts. If you own both companies this is not a problem I imagine.

In addition, if company A writes off a loan to another company does it take a risk of going broke or becoming unable to pay other loans etc.? In effect the decision of a director having an impact on the company finances may make him personnaly liable for paying off debts at a later stage.

Thats about all I can think of, don't know if it's any help tho!
 
If you own both companies this is not a problem I imagine
Click to expand...

Becasue you 100% own both companies in effect you have given yourself some of the comanies money

People understand that a compnay is a legal entity when it comes its liabilities or possibility of getting sued

But forget this when it comes to its assets or loans it has made to others (including directors)

Any company must act in its own interest and not necessarily in those of its shareholders
i.e. writing off debts due to the company from the shareholders may be in the interest of the shareholders, the ultimate owners, but not in the interest of the company as a profit making entity

Loans between common controlled companies and/or shareholders/directors is a very complivated area and if possible should be avoided

[email protected]
 
There was no part of the original question that mentioned a company giving a loan to a director/sharholder, which is a straightforward issue. two companies have engaged in a transaction (at the behest of the owner). One of the companies will benefit is the loan is waived, and taxes/surchages will apply. The other company will suffer a loss, and this will reduce the company profitability (and tax bill I imagine).
 
What is the benefit of the company suffering the loan write off?

A distribution of profits to set off against the loan due is not a profit reducing expense and therfore will not reduce its tax bill

Even if it was reducing a tax bill is not a benefit to a company if it is only going to reduce it by losing money

Otherwise every profit making company would loan money to an offshore company and then write the loan off as an expense and never have to pay tax

no part of the original question that mentioned a company giving a loan to a director/sharholder
Click to expand...

Related companies borrowing from each other is a very tricky issue and not as simple as you are implying
Co A cannot loan Co B money just because it has it
This can be viewed by Revenue as a loan to the director
Have a look at S.437 and S.438 of TCA97

E.g
Why would Co A loan CO B money not expecting to get it back?
What is the benefit to the company making the loan?
Is there interest charged?
What is the exact relationship of the ownership of the two companies?


[email protected]
 
You may need to find out more about 'close company' legislation.

Basically, a 'close company' is one controlled (defined as having >50% of voting shares) by 5 or fewer 'participators' (basically shareholders, but quite broadly defined). I'd guess that both your companies are close companies in that you alone control .

To the best of my knowledge, if a 'participator' receives a loan from a 'close company', the company giving the loan must pay a tax deposit of 20/80 of the amount of the loan. Y

Therefore, the key issue here is whether Co B is deemed to be a participator in Co A- my gut feeling (but I stress that I am not at all certain about this advice!) is that there would need to be a 'cross shareholding' between Co A and B (ie Co B owns some of Co A's shares) for B to be a participator in A and for the issue of surcharges to arise.

You may need to check with your accountant to see if Co A paid such a deposit to the Rev Commsrs when the original loans were made- if it was paid, then there would be a distribution issue arising or a charge to tax on the part of Co B. Additionally, the tax deposit would be lost, I think. I a tax deposit was not paid, then either there's been an oversight [ i.e a deposit SHOULD have been paid but wasn't] or else a distribution won't arise. Co B however, may have some other tax issue arising as it will have benefited by eliminating a liability from its books. Co A would probably be entitled to a bad debt write off which is allowable for tax.

Overall, it's a very tricky issue and I want to stress that the best person to deal with this is your accountant. The only thing I'd note is that - to quote your original post- your accountant said the writing off of the loan would 'probably be treated as a distribution for company B and it will be subject to surcharges'. It sounds like s/he's unsure and I personally wouldn't be at all sure that Co B would have a distribution issue- maybe another type of tax but not a distribution!?
 
Is it necessary to write off the loan?

Presumably Co. B has accumulated losses. Could some of the business of Co. A not be diverted to Co. B to enhance the profits of that company? Create enough profits to use up the loss and pay off the loans.

I think this would be reasonable tax planning and not tax evasion.

Could Company B acquire Company A? There might be some angle there to use up the tax losses. Again, you need to see a tax specialist on this one.

Brendan
 
You must log in or register to reply here.
Back
Top