Business Taxes

10.7.Detail the issues surrounding interest paid to directors and directors’ associates and detail the transactions that affect the Director’s current and loan accounts

The anti-avoidance provisions that apply to any interest on loans paid by a close company to a director (as defined in Section 433 TCA 1997) or his associate are outlined below.

Interest paid to directors and their associates (Section 437 TCA 1997)

This piece of legislation is concerned with any interest on loans paid by a close company to, or to an associate of, a person:

a) who is a director of the close company or of any company which controls or is controlled by the close company (Section 437(3)(a) TCA 1997) and

b) who has a material interest in the company or a company which controls the close company (Section 437(3)(b) TCA 1997). Section 437(2) TCA 1997 provides that a person has a material interest if he, either on his own or with any one or more of his associates is the beneficial owner of, or is able to control, directly or indirectly more than 5% of the ordinary share capital. The director is also caught if any associate of his controls more than 5% of the ordinary share capital.

Such interest payments in excess of a prescribed limit will be treated as distributions (Section 437(4) TCA 1997). The practical effect of this treatment is:

i) For the company – excess interest is added back in the tax adjusted Case I profit computation. The company must account for dividend withholding tax at the standard rate of income tax (currently 20%) when paying the excess interest to the director (Section 172B TCA 1997) and must account for withholding tax at the standard rate under Section 246 TCA 1997 when paying the amount below the prescribed limit to the director.

ii) For the recipient – excess interest is treated as a distribution received, taxable under Schedule F (as opposed to interest income taxable under Schedule D, Case IV). The amount below the prescribed limit continues to be treated as interest income and is taxed accordingly. The recipient will obtain a tax credit for any DWT or interest withholding operated by the company in making the payment.

The prescribed limit is calculated firstly as an “overall” limit. The overall limit is then apportioned between the various directors affected (those with a material interest) on the basis of the amounts of interest paid to each of them (Section 437(5) TCA 1997).

The overall limit is 13% per annum on the smaller of:

a) The total of all loans on which interest to directors (or their associates) with a ‘material interest’ was paid by the company in the accounting period. Where the total of all loans varied during the accounting period, the average total over the period is to be taken (Section 437(6)(a) TCA 1997), or

b) The nominal amount of the issued share capital of the close company plus the amount of any share premium account, taken at the beginning of the accounting period (Section 437(6)(b) TCA 1997).

Basically, if the total amount of interest paid to the directors with a material interest in the accounting period exceeds the overall limit, the excess is treated as a distribution.

Example 10.8

Apple Ltd is a close company whose issued share capital is €10,000 of €1 ordinary shares. In the accounting period ended 31.3.18 it received the following loans:

Shareholding Loans Interest paid
1.4.17 Mr. A Director 3,333 30,000 4,500
1.4.17 Mr. B Director 300 20,000 3,000
1.4.17 Mrs. B (wife of Mr B) 300 -
1.4.17 Mr. C Director 500 10,000 1,500

What are the corporation tax and income tax consequences for Apple Ltd, a close company?


The following directors are affected by the provisions of Section 437 TCA 1997

1. Mr. A is a director and holds 33% of ordinary share capital

2. Mr. B is a director and together with his associates i.e. his wife he holds over 5% of the ordinary share capital.

3. Mr. C does not come within this provision as he holds exactly 5% of the ordinary share capital and does not therefore have the necessary ‘material interest’.

The overall limit is the lower of:

a) 13% of (€30,000 + €20,000) =


b) 13% of €10,000 =

1,300 1,300

Interest paid to directors with a material interest is:

Mr. A 4,500
Mr. B 3,000
Overall limit (1,300)
Excess (treated as distribution) 6,200

This excess of €6,200 is added back in Apple Ltd’s tax adjusted Case I profit computation.

The overall limit is apportioned among the relevant directors according to the interest paid to each:

Interest Paid Limit Excess treated as Distribution
Mr. A 4,500 3,720
Mr. B 3,000 2,480
7,500 €1,300 6,200

Assuming Mr A and Mr B are both Irish resident individuals, per Section 172B(1) TCA 1997, the DWT liability of Apple Ltd in AP ended 31.3.16 is:

€6,200 × 20% = €1,240

As the distribution is in the form of cash Section 172B(1) TCA 1997 applies. The DWT should be retained from the interest payments to be made. If the company pays over the total interest amounts without deducting the DWT, Revenue could technically seek to treat the interest payments as “net” and require the company to pay over additional DWT. This would also impact on the amount of income assessable in the hands of the recipient of the interest in that they would be liable to income tax on the “grossed-up” amount.

The income tax implications for the directors on receiving the distributions are as follows (assuming taxed @ 40%):

Mr A:
Schedule F 3,720
Income Tax @ 40% 1,488
Less: related tax credit (744)
Net income tax payable on distribution 744
Mr B:
Schedule F 2,480
Income Tax @ 40% 992
Less: related tax credit (496)
Net income tax payable on distribution 496

Apple Ltd is obliged to deduct DWT at the standard rate of income tax (currently 20%) from the element of interest that B treated as a distribution and pay this over to the Collector General within 14 days of the end of the month in which the distribution was made.

In relation to the interest allowable as a deduction against Apple Ltd’s income, the company must withhold income tax at the standard rate (currently 20%) from these payments and pay the tax withheld to the Collector General with its corporation tax liability under Section 239 TCA 1997.

This allowable amount of €1,300 and Mr C’s interest of €1,500 = €2,800. The interest withholding tax amount is €560. Mr A, Mr B and Mr C will be liable to income tax on the amount of interest actually received plus the tax withheld by Apple Ltd, in addition to the schedule F distribution noted above. They may then claim a credit for the €560 tax withheld against their own income tax liability, in proportion to the interest they received.

Task 10.6

Discuss the tax consequences of Example 10.8 above if Apple Ltd was not a close company.

Task 10.7

Y Ltd. had the following Statement of Financial Position at 31.12.18:

The rate of interest payable on loans from the director is 10% per annum. Calculate the amount of interest to be treated as a distribution, assuming that Y Ltd. is a close company.

Total Assets 90,000
Financed By
Ordinary Share Capital 10,000
Reserves 40,000
Directors Loan 40,000

The share capital has not changed during the accounting period.

The loan is from one director (who owns 51% of the ordinary share capital) and has been outstanding throughout the year.

How to prepare a Directors Current Account

Step 1: Identify any opening balance on the director’s current account.

Step 2: Identify what transactions the directors have had with the company in the period.

What is their agreed annual remuneration?

Are there any benefits agreed as part of this?

Are there any expense claims for the period?

Have the directors taken any goods/services from the company for their own personal use?

What payments in respect of these have been made to the director?

Have the directors borrowed any funds from the company in the period?

Have the directors lent any funds to the company in the period?

Is there any interest due on any loans outstanding?

Step 3: Identify any payments made to the director, either in respect of the opening balance or in respect of transactions during this period.

Example 10.9

Editors Ltd is a music publishing company.

It has four directors, Paul, Aidan, Frank and Dermot.

Paul and Aidan each own 35% of the shares in Editors Ltd, while Frank and Dermot own 15% each.

Paul and Aidan each receive remuneration of €10,000 per annum while Frank and Dermot receive €25,000 each.

During 2018 Paul gave his car to Editors Ltd for use as a company car. The car was valued at €15,000 at the time.

Aidan has a side project, a band he’s provisionally calling Prometheus, and Editors Ltd has provided Prometheus with €5,500 worth of services during the year.

To finance Prometheus, Aidan has borrowed €5,000 from Editors Ltd. This was originally meant to be a short-term loan but is still outstanding at year end. The other directors think that Aidan will be able to pay it back in the near future.

During the year Dermot borrowed €10,000 from Editors Ltd to buy a car. He repayed the €10,000 to Editors Ltd before the year end.

Editors Ltd made a dividend payment of €2,000 during 2018.

Payments made to directors during the year amounted to:









The opening balance on the current accounts were as follows:


€1,500 (credit)


€500 (debit)


€5,000 (debit)


€2,000 (credit)

Paul’s director Account

Payment 8,000 Balance b/f 2017 1,500
Balance c/f 2018 18,500 Remuneration 10,000
________ Car 15,000
26,500 26,500
  Balance b/f 2018 18,500

You will notice that the dividend does not go into these accounts. The dividend is paid to Paul in his capacity as shareholder and not in his capacity as director. The shareholder and the director have different legal personalities and this legal separation is reflected in the accounts. You should now complete the director accounts for Aidan, Frank and Dermot (Answer at end of chapter).