The Irish High Court has overruled the Tax Appeals Commission ("TAC") and confirmed that a loan write-off was not taxable in the recent case of Arlum Limited v Revenue Commissioners.
In this case, the taxpayer borrowed €9.5 million to develop property in 2006, but €6,043,555 was written-off in a debt-forgiveness deal with the lender following the 2008 financial crisis. Revenue claimed the debt-forgiveness was taxable and won at TAC. Revenue argued that the taxpayer had effectively deducted the amount of the loan for tax purposes because it had a corresponding impairment in the value of the property in its profit and loss accounts. They argued that a provision of Irish law (section 87 TCA) required amounts previously deducted by a taxpayer to be taxed if written-off. Revenue were successful in asserting at TAC that their interpretation of the legislative provision was correct and that the deduction claimed for the impairment was the same as a deduction in respect of the loan. We did not agree with TAC's analysis and considered their analysis to overstretch the natural meaning and scope of section 87 TCA (see our previous article here).
The taxpayer appealed to the High Court, which agreed that Revenue stretched the provision beyond its logical application. The High Court concluded that deducting an amount reflecting an impairment of an asset was – on the plain meaning of the legislation – not the same as deducting the principal amount of the loan that was written-off. This meant the loan write-off was not taxable as the relevant legislation did not bite.
It is fair to say that the original TAC analysis of section 87 TCA surprised many tax practitioners and the High Court decision brings welcome certainty. The taxpayer and its advisors should be commended for persisting in obtaining legal certainty on a point which could otherwise cause material uncertainty for taxpayers who enter into debt-forgiveness arrangements.
Debt-forgiveness and restructuring can be a complicated area of tax law and the correct tax outcome can often depend on the particular facts and circumstances of the taxpayer. Although this is a very welcome conclusion, taxpayers will still need to take care as to how debt-forgiveness should be treated by reference to their own specific circumstances as debt-forgiveness may be taxable where it is of a 'revenue' nature.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
