Debt releases between companies with common shareholders
Debt releases between companies with common shareholders
Chris Holmes in our London Tax Group and David Hicks of Charles Russell Speechlys authored “Debt releases between companies with common shareholders”, published by Tax Journal on 5 February 2021.
The current trading environment is causing many companies to consider releasing wholly or partly recoverable inter-company debts. When considering such debt releases, the corporation tax consequences are often considered first. What is sometimes overlooked is the fact that a debt between companies with common shareholders is usually a distribution to the shareholder; and it is this fact that may deter directors from proceeding with such debt releases. For such debts to be lawfully waived, reserves at least equal to the net book value of the debt are required, but it is the market value of the debt released upon which the shareholder’s tax is calculated. Releasing an irrecoverable loan may therefore mathematically not be taxable, as it has no or little value.
The article includes sections on:
- The legal position:
- What is a distribution and why does it matter?
- Can a waiver of a loan be a distribution?
- Can a waiver of a loan between companies with common shareholder(s) be a distribution?
- The tax position:
- Common corporate shareholders
- Value of distribution
- Other tax issues to consider.
We trust that you will find the article informative and interesting.
For more information, or for assistance, please contact Chris Holmes.