Section 10 provides for the grant of relief in respect of yearly interest, annuities or other annual payments made and certain other interest paid after April 5th, 1976. The principle underlying the section is that these payments (which in the hands of the recipient are in the nature of "pure income" receipts) known as "charges on income" are to be set against the total profits of the company and not against the particular source of income with which the payment is connected. The section incorporates restrictions on the allowance of interest provided for in Chapter III of Part I of the Finance Act, 1974. I shall explain some of the subsections. Subsection (1) authorises the allowance of charges paid after April 5th, 1976, as deductions against total profits for corporation tax purposes. The charges must be paid in the accounting period out of profits brought into charge to corporation tax. They are to be allowed against the total profits as reduced by any other relief, (for example, relief for losses) except group relief.
Subsection (2) provides that the payments for which relief is to be granted as charges on income are to be those specified in subsection (3) excluding any payment in the nature of a dividend or distribution of profits or any payment which is deductible in computing profits for corporation tax purposes—for example, interest payable wholly and exclusively for the purposes of a trade.
Subsection (3) defines the payment to be regarded as charges on income, namely,
(a) yearly interest, annuities or other annual payments (including certain mining and other rents),
(b) patent royalties, and short interest payable to a bank, stockbroker or discount house carrying on business in the State.
Interest in the case of a trading company is normally allowed in the accounts of the company in a trading expense and therefore will not be allowed as a charge on income. The subsection also provides that short interest payable to a bank, stockbroker or discount house is to be regarded for the purposes of the section as paid on the date it is debited to the company's account in the books of the bank.
Subsection (4) provides that, where the payment is to a non-resident, it is not to be allowed as a charge unless the paying company is resident in the State and (a) it is entitled to deduct income tax from the payment and accounts for it to the Revenue or (b) the payment is payable out of foreign investment income brought into charge to tax under Case III of Schedule D.
Subsection (5) prohibits a deduction if the payment (a) is charged to capital or is not ultimately borne by the company and (b) is not paid under a liability incurred for valuable and sufficient consideration. In the case of a non-resident company there is the additional condition that the liability must be incurred for the purposes of a trade carried on in the State through a branch or agency. Subsection (6) limits the amount of interest that may be treated as a charge on income.
Subsection (7) excludes from the provisions of subsection (6) interest on loans applied to acquire a material interest in certain companies, mainly trading companies and companies whose income consists wholly or mainly of income chargeable under case V of Schedule D?
