Loss Issues

General

The rules for companies’ losses are broadly similar to those in respect of sole trader/partnerships. Losses may be set against total profits of the period or may be carried forward against profits of the same trade. They may be carried back against the profits of  a preceding accounting period of the same length ..

If there are still surplus losses, they may be carried forward against future profits of the same trade.

Losses may be set forward against trade taxed at the same rate. Losses against a trade taxed at the higher rate are allowed on a value basis only. In effect half / (12.5%/25%) of the lower rate profits are available against income taxed at the higher rate.

Foreign Profits and Losses

All foreign trades, foreign rents, investment income and deposit income categorized as Sch D Case III  is aggregated under a single heading. Therefore generally losses will be offset against gains and profits.

A trade carried on wholly abroad, is taxable at 25%.  Losses on such trades can only be carried forward against future profits of the same trade.  There are not aggregated with other Sch D Case III income. Losses may not be claimed against other profits of the same period or carried back.

Rental or Property Income

Rental or property income is categorised separately to trading and investment income.  All rental income is deemed to arise from a single source so that the aggregate profits on all profits are netted against the aggregate rental losses.

Where there is an overall rental loss, the loss may be carried back against rental income of the previous period of the same length. Any remaining balance can be carried forward indefinitely against rental income.

Management expenses incurred by companies investing in residential property are restricted. They may be used in later years against future rental income concerned.

The claim to carry back must be made within two years of the end of the accounting period in which the loss is incurred.  Losses against rental income may not be shared amongst a group of companies.

Property Capital Allowances

Some  capital allowances granted in relation to property investment receive favourable treatment. These  capital allowances may be off set against non-rental income in to a greater extent than property allowances and losses generally. These excess capital allowances which are not used in the current period may be:

• deducted from profits of the current accounting period, i.e. other income including non-development land capital gains;
• deducted from profit of an immediately preceding period of equal length and / or carried forward indefinitely against rental income.

In addition group relief may be claimed against such allowances.  There are no restrictions as the allowances are offset against income taxable at 25%.  The claim to carry back excess allowances must be made within two years.

Capital Losses

Capital gains by companies are charged to corporation tax.  This is in contrast to the position with an individual, by which capital gains and capital losses are wholly separate and insulated from trading (and other income) gains and  losses.

Nonetheless capital losses may be offset only  against capital gains of the same period and carried forward  against future capital gains.

Development land is treated separately.  Losses on non-development land may be set off against gains on the same lands.  This may be carried for indefinitely.

Restrictions on Late Claim

Restrictions are imposed on claiming certain relief if a return is not made in time. See the chapter on returns and late returns. Where returns are made more than two months later there is a 50% restriction on the amount of relief that would be otherwise available.  This is limited to €158,715.

Where it is filed within two months of the due date, the restriction is 25% or €31,740 maximum. This restriction covers loss relief as well as excess capital allowances and losses surrendered from group companies.

Anti-Avoidance Restrictions

There is a range of general and targeted anti-avoidance legislation that is aimed at preventing artificially manufactured claims of losses and allowances. Where shares are disposed of in the subsidiary company, the value of that company may have been artificially reduced by transactions by which assets were transferred at undervalue or by payment of a dividend before sale.

Where a company has incurred losses or holds assets which have lost value at the point it enters a group, losses later incurred on the later sale or disposal of those  shares or  assets held by the company before entry are disallowed or restricted.

Non-commercial or ‘”hobby” farming trade losses are restricted. They may not be used against total profits in the current or previous year. They may be used against future farming profits and income in later periods. Losses in farming, gardening are restricted where it is not carried on a commercial basis with a view to realisation of profits in the accounting period or where a loss was incurred in each of the three preceding periods. There are exceptions by which application can be made to disapply the restriction on certain grounds.

Where there has been transaction involving disposal of assets below market value between group companies and certain other so-called depreciatory transactions, the loss on  the disposal of shares in the company which undertook the transaction is restricted or disallowed.

Where there have been distributions to shareholders which reduce the value of the company such that its shares are materially reduced in value,  the loss of the company on the  disposal of those shares is restricted or disallowed.

Transfer of the trade

Where a company ceases to carry on a trade and a successor company carries on the trade in succession, then subject to conditions, the successor company can take the existing losses and capital allowances. In the absence of this relief, there would be a cessation of trade with the possibility only of terminal loss relief.  The cessation of the trade may also cause there are to be balancing charges or balancing allowances.

It is a condition that any time within two years before transfer of the trade and one year after transfer the same persons  have at least 75% interest in the trade.

The relieving provisions may be available to the transfer of the whole trade or part of a trade or certain other activities. However in the latter case the requirement that there be a discontinuation of the trade and a succession to the same trade by another may not be fulfilled.

Provided the conditions are fulfilled, the successor may claim the losses of the predecessor company in the same way as the predecessor would have been entitled to.

Where there is a change of ownership and a major change in the nature of conduct of the trade carried out within a three-year period before or after transfer then the losses are disallowed.