Transfer of Losses
Although each company in a group is a separate entity, tax law allows them to be treated as a unit for some taxation purposes. Losses and assets may be passed between group members on a tax neutral basis, subject to compliance with conditions. There are provisions which undo the benefit of exempt tax transfers, when a company which has obtained benefit, leaves the group, within a certain period.
See our separate chapters in relation to the use of losses and capital allowances incurred by companies. They may be used by the company to obtain relief from tax in a number of ways. Where the losses are not required for tax relief by the company which incurred them, that company may be able to transfer them for use to other companies within the same group.
Losses and excess capital allowances and charges may be surrendered from one group company to another. The companies must each be in the same group, for tax purposes. The definition of a group is narrower than in a company law context. This is to prevent the creation of artificial groups which are not so in substance and economic reality.
There are different percent shareholdings required for the various reliefs. For example, loss relief requires 75% shareholding. One company must be (at least) a 90%/75%/50% plus subsidiary of the other or both must be 75% subsidiaries of a third company.
The shareholding can be direct or indirect. There must be a beneficial shareholding. It must relate to 90%/75%/50% plus of the profits and gains available to the equity holders and 90%/75% /50% plus of the assets/ funds available on a winding up.
The entitlement to profits is based on accounting profits. The winding up test is made by reference to a notional winding up based on balance sheet values. Where there is no surplus an assumed loss of €100 is the basis of calculation.
Holdings by share dealing/investment companies do not qualify. There are anti-avoidance provisions. The parent must control the subsidiaries and there must not be other arrangements for transfer or exercise of control. Shareholding arrangements which seek artificially to create a group are countered so that there is deemed to be no group. Arrangements which temporarily satisfy the definitions are disregarded.
75% ownership, in the above sense, is required for the surrender of losses between group members. The group in this sense requires that one company is a 75% subsidiary of the other or vice versa or that both are 75% subsidiary of third holding company.
Losses who may be surrendered within a group, include losses as increased by capital allowances. Excess rental capital allowances may be group relieved. This may arise in relation to leased buildings in a group scenario or leased plant and equipment. Trading charges may be relieved in the same manner as trading losses.
Trading losses of the company surrendering the loss may be set against trading income of the company claiming the loss. Any excess or unused losses may be put against tax on the passive income (25%) and capital gains by way of a credit on a value basis (i.e., reduced for the proportion that the trading rate bears to the passive or CGT rate.)
Only the current year’s losses may be surrendered. Losses carried forward or back cannot be surrendered. All or part of a loss can be surrendered. The surrendering company cannot surrender any more loss than what the receiving company can use.
Current year losses and charges and losses forward from previous years must be first used by the recipient (claiming) company, before group reliefs. However, it need not use losses carried back of losses from subsequent periods, before use of losses surrendered in by a group company.
The losses must relate to corresponding accounting periods in the two companies. The respective profits and loss are time apportioned for the relevant corresponding period.
They are apportioned, on a time basis and the loss is not allowed outside of the corresponding period. The companies must be members of the same group during the relevant corresponding accounting periods
It is a general principle that the surrender must be by a company which is within the charge to Irish corporation tax. Therefore, for example profit attributable to a branch or subsidiary in another country, being subject to Irish tax, may be surrendered.
Formerly, the relief was restricted to Irish resident companies. However, EU anti-discrimination principles required that this be extended so that EU resident group members qualify. It also applies to companies’ resident in a country with which Ireland has a double taxation agreement (DTA). The shareholding for group purposes must be traced through companies’ resident in a EU/EEA/DTA country.
The Irish resident parent can receive the benefit of a loss from on EU / EEA/DTA subsidiary. The loss must be calculated in accordance with the tax law of the state of the subsidiary. It must not be available to that subsidiary for surrender in the current period, prior period, or otherwise. It may not be allowable in any other EU state.
Under EU provisions trading losses incurred by a 75% subsidiary in another EU state may be surrendered to the parent company which is resident in the state. The principles applicable are similar to those which apply to resident companies.
There are restrictions and conditions. Other reliefs must first be claimed. It must not otherwise be available for surrender, relief or offset in accordance with the laws of Ireland or the relevant EU state (or other country with which Ireland has a DTA). In effect it must be otherwise unusable. The claim must be made within two years of the end of the accounting period.
Both companies must consent to the claim in the tax return. The claim may usually be made within two years of the relevant accounting period of the surrendering company.
The amount to be surrendered for relief against losses may be agreed. It need not be the whole loss. The surrendering company can use part of the loss and surrender the balance. A payment can be made for the surrender of the loss
There are anti-avoidance provisions to prevent use of the relief where any arrangements are in place by which the group relationship may be broken or may be controlled or capable of being controlled by another entity.
The general restrictions on claiming relief in the case of late filing, applies. Where the delay is less than two months, the claim is reduced by 25% subject to a maximum of €31,740. Where the delay is longer than this, the restriction is 50% subject to a maximum restriction of €158,715.
There are certain restrictions and anti-avoidance legislation applicable to the surrender of losses. Payments made by the recipient to the surrendering company, for the tax benefit received, are not taken into account in computing profits.
Consortium relief is a more limited form of relief, than group relief. It may be available where companies are not in a 75% group in accordance with the above conditions. It may be useful in the case of joint venture, where there are a number of parties with less than 75% shareholding.
The company surrendering must be a trading company and at least 75% of its shares must be owned by five or fewer companies with each owning at least a 5% share. At least 75% of the shareholders must be resident in an EEA state or a state with which Ireland has a double taxation treaty. When the shareholding is an investment, loss relief is not available.
Losses may be surrendered from the consortium company concerned to the member concerned but not vice versa. The percentage of the loss is limited to the member’s percentage. The loss must be claimed within two years of the end of the accounting period of the company surrendering the loss. The consent of other members of the consortium is required.
Capital losses cannot be surrendered; only trading and income losses qualify. However, it is possible to transfer assets between group companies, so the capital gain (or loss) is incurred by the company which has capital losses (or gains) so that the benefit of the losses are made available, indirectly.
Capital losses incurred by a company before it became a group member or losses incurred on assets held by the company before it became a group member maybe offset only on gains and assets held by that company when it became part of the group or against assets held for trading purposes and acquired after becoming a group member from an unconnected third-party.
The effect is that pre-entry losses incurred and losses in value of pre-entry assets are perpetually restricted for offset only the against capital gains on a limited category of assets. Assets which are derived from pre-entry assets remain pre-entry assets for this purpose. The ability to offset against gains on the sale of trading assets acquired after group entry does not apply where there has been a major change in the nature or conduct of the trade in the meantime.
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