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High Court overrules TAC on loan write-off

Lawyers at Matheson have welcomed the legal certainty provided by a recent High Court judgment that overruled a decision by the Tax Appeals Commission (TAC).

In Arlum Limited v Revenue Commissioners, the court confirmed that a loan write-off was not taxable.

In the case, the taxpayer borrowed €9.5 million to develop property in 2006, but just over €6 million was written off in a debt-forgiveness deal with the lender after the 2008 financial crisis.

1997 act

Revenue claimed that the debt-forgiveness was taxable, and won at the TAC, having 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.

The tax authority argued that a provision of Irish law – section 87 of the Taxes Consolidation Act 1997 – required amounts previously deducted by a taxpayer to be taxed if written off.

On appeal, however, the High Court found that Revenue had 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 that the loan write-off was not taxable.

‘Complicated area of law’

In a note on the firm’s website, the Matheson lawyers say that the original TAC analysis of section 87 surprised many tax practitioners, adding that the High Court decision brought “welcome certainty”.

They add that the point at issue could otherwise cause “material uncertainty for taxpayers” who enter into debt-forgiveness arrangements.

The Matheson lawyers warn, however, that debt forgiveness and restructuring can be a complicated area of tax law, and that the correct tax outcome can often depend on the particular facts and circumstances of the taxpayer.

“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,” they conclude.