Loss on a loan to a sister company: when is it deductible?

From sister company to participation

The BV had advanced money to a sister company at different times. It later acquired that company’s shares, after which dissolution followed. The dispute concerned both loan write-downs and the participation liquidation-loss rules. Those rules depend, among other things, on the amount recognised as sacrificed for the participation. That is not necessarily equal to every amount paid within the group.

The oldest loan was not shown to be non-businesslike

For the loan advanced before 2018, the court held that the inspector had not supplied enough facts to establish that it was non-businesslike. Subsequent negative equity was insufficient on its own. Nor was it adequately demonstrated that the loan had become non-businesslike during its term. Dissolution established that repayment would not occur, so the remaining loss on this loan could be recognised.

Repayments reduce the deductible amount

The earlier loan originally amounted to €196,208. A previous transfer of assets had resulted in a €90,207 set-off. No different allocation between the loans had been substantiated, so the court allocated that payment to the oldest loan. The deductible loss was therefore €106,001. Evidence is needed not only of a loan’s character, but also of the balance actually outstanding.

Later loans do not automatically increase the liquidation loss

The parties agreed that three later loans were non-businesslike. The BV sought to include the loss on them in the amount sacrificed for its participation. The court rejected this. What mattered was the capacity in which it had accepted the debtor risk. When advancing the money, it was not yet the borrower’s shareholder. The alleged restructuring plans were insufficiently supported to change the outcome in this case.

Document financing and restructuring separately

For each loan, record its purpose, the borrower’s financial position, the terms and expected repayment. Also record how repayments and set-offs are allocated. A later restructuring should not lead to earlier financing being treated retrospectively as one undifferentiated amount.

The BV succeeded in part: the assessment was reduced to nil and its tax loss was set at €22,385. This judgment is not a general approval of deductions for group-loan losses. Oudshoorn can help establish the financing history and its consequences for your corporate tax position.

More information from Oudshoorn

• Corporate income tax returns
• Restructuring and business transfers