Part 13-02-03 - Company Charge to Income Tax on Loans to Participators

Tax and Duty Manual Part 13-02-03

The information in this document is provided as a guide only and

is not professional advice, including legal advice. It should not be

assumed that the guidance is comprehensive or that it provides a

definitive answer in every case.

Company Charge to Income Tax on Loans to Participators

Part 13-02-03

This document should be read in conjunction with sections 438, 438A, 439, 239 and 243 of

the Taxes Consolidation Act 1997

Document last reviewed November 2022

Tax and Duty Manual Part 13-02-03
2
Table of Contents
Introduction ..............................................................................................................................3
1. Extended meaning of the word ‘loan’...............................................................................4
2. Loan or advances not to be treated as annual payments .................................................4
3. Interposition of an Intermediary.......................................................................................5
4. Non-Applicability of Paragraph 3 ......................................................................................6
5. Registered Industrial and Provident Societies ..................................................................6
6. Repayment of loan or advance .........................................................................................6
7. Application of section 239.................................................................................................7
8. Treatment of borrower where debt is released................................................................7
9. Section 438A and Finance Act 2018 Amendment .............................................................7

Tax and Duty Manual Part 13-02-03

Introduction

Where a close company makes a loan or advances money to –

(a) an individual who is a participator in the company, or

(b) an individual who is an associate of a participator in the company, or

resident companies if the loan was made on or after 6 February 2003), or

(d) a company which is acting in a fiduciary or representative capacity and is a

participator or an associate of a participator in the close company

then, unless the loan or advance was made in the ordinary course of the close company's

business and that business includes the lending of money, the close company is obliged to

account to Revenue under section 239 (as a “relevant payment”) for income tax, at the

standard rate for the year of assessment in which the loan or advance is made, on the

grossed-up equivalent of the loan or advance, as if that grossed up equivalent were an

annual payment made by the company. This, however, will not be allowed as a charge on

the company’s income within the meaning of section 243 (“allowance of charges on

income”).

The charge to income tax is imposed on the company by “deeming” the company “to have

paid...an annual payment”. This deeming is “for the purpose of section 438 only”.

Consequently, the "deemed" annual payment is not to be regarded as income in the hands

of the borrower, and the borrower is not entitled to any credit for the income tax borne by

the company in respect of the "deemed" annual payment.

As regards,

 the meaning of “loan or advance”, see paragraph 2 below.

 the definitions of “participator” and “associate of a participator”, see paragraphs 3 -

11 of Tax and Duty Manual Part 13 -01-02.

 reciprocal arrangements, see paragraphs 3 and 4 below.

 treatment of the borrower, where the loan or advance is released, see paragraph 8

below.

“Individual” includes “individuals” [section 11(a), Interpretation Act, 1937].

Therefore, where a close company makes a loan or advance to a partnership and one of the

partners is a participator in the company, the other partners are his associates and the loan

or advance, is within (a) and (b) above.

Similarly, where a loan is made to trustees and any shares or obligations of the company are

subject to the trust, the trustees are participators and/or associates of a participator and the

loan is therefore within (a) and (b) above. Where the trustees are a “trust company” and

that company is a participator or an associate of a participator, (d) above will apply.

Section 438 applies only if the company is a close company at the time the loan or advance

is made.

Tax and Duty Manual Part 13-02-03

1. Extended meaning of the word ‘loan’

Where a close company is regarded as making a loan to any person, the meaning of “loan” is

extended to include the following;

(a) Where the person incurs a debt to the close company – however, this does not apply

if -

 the debt is incurred for the supply of goods or services in the ordinary course

of its trade of business, and

 the credit given by the company to that person does not exceed six months

or the period of credit normally given to the company’s customers,

whichever is the shorter.

(b) Where a debt due from the person to a third party is assigned to the close company.

Where (a) or (b) above applies, the company is regarded as making a loan equal to the

amount of the debt [see section 438(2) TCA].

2. Loan or advances not to be treated as annual payments

Where a close company makes a loan or advance, for any purpose, to a director or

employee of the close company or of its associated company, that loan or advance is not

within section 438, if all the following conditions, are satisfied: -

 neither the amount of the loan nor that amount when taken with any other loans

made by the close company or any of its associated companies to the borrower or to

the spouse or civil partner of the borrower exceeds €19,050,

 the borrower works full-time for the close company or any of its associated

companies, and

 the borrower does not have a material interest in the close company or any of its

associated companies.

Where the borrower acquires a material interest (or an existing interest is enlarged so as to

become material) at a time when any loan remains wholly or partly outstanding, the

company is to be regarded as making to him/her a loan or loans equal to the amount or

amounts so outstanding at the time when the material interest is acquired. Loans deemed

to be so made are not excluded and the company is required to account to Revenue for tax

in accordance with the provisions of section 438(1).

Relief is therefore not given for loans intended to be used to increase substantially the

borrower’s stake in the company.

Tax and Duty Manual Part 13-02-03

3. Interposition of an Intermediary

A loan which is not directly within section 438(1), but which is part of an arrangement,

which includes a payment or transfer of assets to (or liabilities from) a participator or

associate of a participator, is deemed to have been made to that participator for the

purpose of section 438(1) [section 438(5) refers]. For example, a loan to enable employees

or trustees, who are not participators, to buy shares from an existing shareholder.

However, the loan may be exempted, if the deemed borrower (i.e. the existing shareholder

in the company), can show that the deemed loan to him/her satisfies the conditions in

section 438(3).

Section 438(5) provides that:

“Where under arrangements made by any person otherwise than in the ordinary course of a

business carried on by that person—

(a) a close company makes a loan or advance which, apart from this subsection, does

not give rise to any charge on the company under subsection (1), and

(b) some person, other than the close company, makes a payment or transfers property

to, or releases or satisfies (in whole or in part) a liability of, an individual who is a

participator in the company or an associate of participator,

then, unless in respect of the matter referred to in subsection (b) there is to be

included in the total income of the participator or associate an amount not less than

the loan or advance, this section shall apply as if the loan or advance had been made

to the participator or associate.”

This is subject to paragraph 4 of this Instruction below.

Example 1

X Ltd., a close company, instead of making a loan to A, an individual participator,

makes it to an associated company, Y Ltd. The latter then passes the loan to A.

The loan by X Ltd. to Y Ltd. is treated as if it had been made direct to A.

Example 2

A Ltd., a close company, makes a loan to D, an individual who is a participator in B

Ltd., but not in A Ltd. B Ltd., acting in concert with A Ltd., then makes a loan to E, an

individual who is a participator in A Ltd. but not in B Ltd.

A Ltd and B Ltd are treated as if they had made loans to their own participators, i.e. E

and D respectively.

Tax and Duty Manual Part 13-02-03

4. Non-Applicability of Paragraph 3

The provisions in paragraph 3 above, do not apply, where as a result of the payment,

transfer, release, within section 438(5)(b), an amount not less than the loan or advance falls

to be included in the total income of the recipient of the payment.

For example, this may happen where the payment to the recipient is treated as his income

for income tax purposes, e.g. as a distribution within sections 130 - 135 or section 436.

5. Registered Industrial and Provident Societies

A registered industrial and provident society is treated as a close company if it would be

such, but for the exclusion of such societies contained in section 430(1)(b). Accordingly,

loans and advances made to a participator in such a registered industrial and provident

society may be subject to a charge to tax under this section [section 438(8) and section 430

refer].

6. Repayment of loan or advance

Where the possibility of repayment arises, the relevant period for claiming relief is 4 years

[section 438(4)].

This section now reads:

(4) (a) Where, after a company has been assessed to tax under this section in

respect of any loan or advance, the loan or advance or any part of it is

repaid to the company, relief shall be given from that tax or a

proportionate part of that tax by discharge or repayment.

(b) Notwithstanding any limitation in section 865(4) on the time within which a

claim for a repayment of tax is required to be made, relief under this

subsection shall be given on a claim which shall be made within 4 years,

from the end of the year of assessment in which the loan or advance, or

any part of the loan or advance, is repaid to the company.

Tax and Duty Manual Part 13-02-03
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7. Application of section 239
The formal procedure for the purposes of the charge, assessment and recovery of income 
tax (on payments by resident companies), prescribed by section 239, applies to any amount, 
which under section 438, is deemed to be an annual payment [section 239(1)(a)].
8. Treatment of borrower where debt is released
Where a company, which has been or is liable to be assessed under section 438 in respect of 
a loan or advance, releases or writes off the whole or part of the debt thus created, the 
person to whom the loan or advance was made is regarded, for the purposes of computing 
his/her total income, as having received at that time, income of an amount which (after 
deduction of income tax at the standard rate) is equal to the amount released or written off 
[section 439(1)(a)].
The income tax notionally deducted under this procedure is not repayable and is not 
available to relieve the recipient of any obligation to account for tax on annual payments 
made by him/her [section 439(1)(b) and (c)].
In respect of any part of the amount released which is charged at less than the standard rate 
of income tax, the tax credit is not to exceed the amount of tax charged. In respect of any 
part of the amount released which is charged at standard rate or higher rate, the tax credit 
is equal to tax at the standard rate, on the amount so charged [section 439(1)(d)].
Where a loan, to which section 438 applies, was made to a person who has died, or to the 
trustees of a trust which has terminated, and all or part of the loan is written off, the 
deemed income represented by the debt released is regarded as income of the estate or the 
beneficiary, as the case may be, at that time. Where the loan is written off to the benefit of 
the estate of a deceased person which is under administration, the income is treated as 
chargeable to income tax at the higher rate [section 439(2)].
Sections 439 and 438 are to be construed together [section 439(3)].
9. Section 438A and Finance Act 2018 Amendment
Section 438A is an anti-avoidance provision which extends the scope of the close company 
charge to income tax charge under section 438 to loans made by a company which is 
controlled by, or which subsequently comes under the control of, a close company, where 
such loans would otherwise not give rise to a charge under section 438.
Finance Act 2018 inserted a new provision into section 438A to ensure that certain tax 
avoidance arrangements, not currently caught by the provisions, will fall within the scope of 
the section 438 charge. Consequently, where a close company does not make the loan itself 
but sets up or acquires a subsidiary to make the loan to participators in the parent close 
company, this situation will also come within the scope of the section 438 charge.
See Part 13 Close Companies for guidance notes on sections 430 to 441 TCA 1997.
See Tax and Duty Manual Part 13-02-04 for information on the operation of Preliminary Tax 
in this context.