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Amendment of section 840A of Principal Act (interest on loans to defray money applied for certain purposes)
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49. (1) Section 840A of the Principal Act is amended—
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(a) in subsection (2), by the substitution of “Subject to subsections (3), (6), (7), (7A) and (8)” for “Subject to subsections (3), (6), (7) and (8)”, and
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(b) in subsection (7), by the substitution of the following paragraph for paragraph (a):
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“(a) where, other than the holding of shares in an investing company or investing companies, the only business of the first-mentioned company is the on-lending to the investing company or investing companies of moneys which the first-mentioned company has borrowed from persons who are not connected with either or both the first-mentioned company and the investing company or investing companies;”,
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(c) by the insertion of the following subsection after subsection (7):
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“(7A) (a) For the purpose of subparagraph (b)(ii)(II), ‘relevant territory’ and ‘tax’ have the same meaning, respectively, as in section 246.
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(b) Subject to paragraph (c), subsection (2) shall not apply to an amount of interest on a loan (in this subsection referred to as the ‘connected loan’) made to an investing company by a person who is connected with the investing company (in this subsection referred to as the ‘connected lender’) used in acquiring an asset for the purposes of its trade from a company which, at the time of the acquiring of the asset, was connected with the investing company (in this subsection referred to as the ‘connected seller’), where—
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(i) the connected seller had borrowed to acquire the asset such that the interest on the borrowings of the connected seller gave rise to a reduction or relief in computing the amount of profits or gains of the connected seller to be charged to corporation tax under Schedule D, prior to the acquisition of the asset by the investing company,
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(ii) the connected lender—
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(I) is subject to tax in the State on the interest income in relation to the connected loan, or
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(II) by virtue of the law of a relevant territory, is resident in a relevant territory for the purposes of tax and, under the laws of the relevant territory, is subject, without any reduction computed by reference to the amount of such interest, to a tax on the interest income in relation to the connected loan,
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and
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(iii) it is reasonable to consider that the connected loan is made for bona fide commercial purposes and does not form part of any arrangement or scheme of which the main purpose, or one of the main purposes, is the avoidance of tax.
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(c) (i) For the purposes of calculating the amount of interest to which paragraph (b) applies, the principal on the connected loan shall not exceed—
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(I) the principal outstanding on the borrowings of the connected seller in respect of the asset concerned at the time immediately prior to the acquisition of the asset by the investing company, or
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(II) where subparagraph (ii) applies, the maximum principal amount.
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(ii) (I) This subparagraph shall apply where, by virtue of paragraph (b), subsection (2) has not applied to an amount of interest on a connected loan made to a company that is connected with the investing company (referred to in this subparagraph as the ‘previous investing company’) in respect of a previous acquisition of the asset concerned from a company connected with the previous investing company (referred to in this subparagraph as the ‘previous connected seller’).
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(II) Where this subparagraph applies, the ‘maximum principal amount’ shall be an amount equal to the principal outstanding on the borrowings of the previous connected seller at the time immediately prior to the acquisition of the asset concerned by the previous investing company and, where there has been more than one previous acquisition referred to in clause (I) in respect of the asset concerned, the maximum principal amount shall be an amount equal to the principal outstanding on the borrowings of the previous connected seller at the time immediately prior to the acquisition of the asset concerned by the previous investing company in the earliest such previous acquisition of the asset concerned to occur.
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(iii) For the purposes of calculating—
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(I) the principal outstanding on the borrowings of the connected seller in respect of the asset concerned at the time immediately prior to the acquisition of the asset by the investing company, or
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(II) where subparagraph (ii) applies, the maximum principal amount,
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where only a portion of the borrowings relate to the asset that is acquired by the investing company, then the principal outstanding on the borrowings or the maximum principal amount shall be apportioned on a just and reasonable basis.
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(2) Subsection (1) shall apply to an acquisition of an asset (within the meaning of section 840A of the Principal Act) on or after 1 January 2024.
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