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Assigning Receivables: Minimising the Potential Tax Implications

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capital_gains_tax.jpgUnder Irish tax law, a debt receivable is an asset for Irish Capital Gains Tax (CGT) purposes. Therefore, the assignment by an Irish company of a receivable would be a disposal by that company of an asset. 

By structuring the transaction and documentation in a tax efficient manner, it is possible to minimise the potential Irish tax implications where an Irish company assigns its receivable, i.e. a debt or loan that someone owes to the Irish company.

Irish Stamp Duty 

Where assigning receivables comes within the Irish Stamp Duty (SD) charge, the rate of duty will be 2%.

The duty will be levied on the market value of the receivable or the consideration provided for the transfer of the receivable, whichever is greater. In the majority of cases, the duty will be assessed on the transferee, i.e. the person to whom the receivable is assigned.

However it may be possible to avoid the SD liability by availing of two reliefs from Irish SD or by novating the receivable.

Related: Tax Issues: Non-Irish Residents Transferring Irish Company Shares

Relief 1 – Loan Capital Exemption

Irish SD legislation contains an exemption from SD on the transfer or assignment of loan capital (i.e. debenture stock, bonds or funded debt), provided certain conditions are satisfied. 

Related: Ireland’s New Tax Relief Scheme For Entrepreneurs

Relief 2 – Associated Companies Relief

Provided certain conditions are satisfied, it may be possible for the parties to avail of Associated Companies Relief, (i.e. group relief) on the assignment of the receivable.

Novation

If the assignment of the receivables does not fall within the two reliefs set out above, it may also be possible to avoid the potential SD liability by novating the receivable.

Provided the novation documentation is drafted correctly, novating the receivable will not be regarded as the assignment of the receivable for Irish SD purposes.  

Irish Capital Gains Tax 

Under Irish tax law, a debt receivable is an asset for Irish Capital Gains Tax (CGT) purposes. Therefore, the assignment by an Irish company of a receivable would be a disposal by that company of an asset. 

Under Irish tax law, no chargeable gain accrues to the original creditor on a disposal of a debt.

There is an exception to this rule in the case of a “debt on a security”. In order to be regarded as a debt on a security, a loan would generally have the following characteristics:

    • It can be realised or dealt with at a profit, i.e. marketable;
    • It is capable of being assigned;
    • It is capable of being converted into shares;
    • It has a structure of permanence (e.g. not repayable on demand); and
    • It is capable of bearing interest.

Typically, a debt on a security is a debt instrument that would be held for investment purposes. It may be convertible into shares and sold at a profit.

Therefore where an Irish company assigns a receivable, no Irish CGT issues will arise where:

    • The Irish company is the original creditor; and
    • The receivable does not constitute a “debt on security”.

Related: The CGT 7 Year Relief

Transfers Of Receivables At Under Value

Where an Irish company transfers a receivable to either its shareholder or a third party for an amount less than market value, it is important to consider the following Irish taxation issues: 

    • Potential distribution issues for the Irish company where the receivable is transferred at undervalue to the company’s shareholder(s) or an “associate” of the shareholder(s). An “associate” includes but is not limited to siblings, spouses and parents;
    • Potential Irish tax implications for the person to whom the receivable is assigned. 

Disclaimer 
Please note that this commentary does not purport to be a comprehensive review of the Irish tax treatment on the assignment of receivables by Irish companies.  Detailed appropriate advice should be taken before any particular transaction is entered into.

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