Closure of loophole relating to the relief for individuals in respect of interest paid on loans taken out to acquire an interest in certain companies.

1.   The Minister for Finance, Mr Charlie McCreevy TD, announced today the closure of a loophole relating to the relief available to individuals in respect of interest paid on money borrowed for the purposes of acquiring an equity stake in, or lending money to, a company or a partnership.
2.   On 20 January last, the Minister signalled the closure of a related loophole in regard to the transfer of capital allowances on buildings from companies to individual investors.  There was a mismatch in such situations between the low rate of corporation tax paid by the company on the clawback of the capital allowances and the higher income tax rate against which the capital allowances were claimed by the individual investors.  Section 13 of the Finance Bill 2003, as passed by Dáil Éireann, contains a measure to protect the Exchequer from such tax arbitrage arrangements. Under this measure, where a building in respect of which a company has claimed capital allowances is now sold to individual investors, those investors will be entitled to set the capital allowances related to the building solely against their rental income from the building concerned.
3.   It has now come to the attention of the Minister that arrangements are being considered, the effect of which would be to circumvent the FinanceBill 2003 restriction.  The tax consequences of the arrangements which have come to light would be broadly similar to those which would have applied if the investors had been entitled to set the capital allowances related to the building against all their income.  Essentially, the arrangements involve the use of loan finance by investors in an intermediary company or partnership. 
4.   The Minister said that he was acting immediately to close off these contrived arrangements.  This measure, which will be effective on and from today, will be contained in the Budget/Finance Bill 2004.  Full details will be set out in draft legislation which will be made availablepublicly before then. 
5.   A broad outline of what is proposed is set out in the Appendix to this Press Release.  The Minister also said that any other variations of these or similar arrangements which come to his attention in the interim will also be closed off with immediate effect in the legislative provisions to be introduced.                                               

Appendix

Broad Outline of Provision

Where individual investors borrow money to directly or indirectly lend to, or invest in, a company or a partnership, and —
·   claim relief by reference to section 248, 250 or 253 of the Taxes Consolidation Act 1997 in respect of the interest paid on those borrowings,
·   the company or partnership uses the money to purchase a specified building (within the meaning of the new section 409E of that Act proposed to be inserted by section 13 of the Finance Bill 2003, as passed by Dáil Éireann), and
·   if the investors had personally bought the specified building and leased or rented it to another person or persons, section 305(1)(c) of the Taxes Consolidation Act 1997 (proposed to be inserted by section 13 of the Finance Bill 2003, as passed by Dáil Éireann) would have applied to capital allowances claimed by them in respect of the building,

then, the amount of the interest paid, on or after 19 March 2003, in respect of the money borrowed by the investors and lent to, or invested in, the company or partnership and which qualifies for relief by reference to section 248, 250 or 253 of the Taxes Consolidation Act 1997 for any tax year will be restricted by reference to-
·   where the intermediary vehicle is a company, the amount of the distributions or interest received by the investors from the company for that year in respect of the money they have lent to, or invested in, the company, and
·   where the intermediary vehicle is a partnership, the amount of the individual partner’s share of the rental income from the building or the amount of arm’s length interest received by them from the partnership for that year in respect of the money they have lent to, or invested in, the partnership.

The relevant provisions to be introduced in Finance Bill 2004 will also cover any other variations of these or similar arrangements which come to attention in the meantime.