In recent weeks, we have talked quite a lot about the current funding options available for Irish Small and Medium Enterprises (SMEs). As SMEs continue to become a large part of the Irish economy during the recovery, their funding has been an important topic to cover as it is important to ensure the survival and stability of these companies. As previously discussed, the banks remain the largest source of funding to Irish SMEs.
Recently, Revenue have warned SMEs about the possibility of additional tax charges on loans which may have been sold to so-called ‘vulture funds’. These vulture funds have long been a hot topic of contention when it comes to SMEs. It was recently discovered that the acquisition of distressed loan books can trigger a demand for withholding tax on interest paid on individual loans, for which the borrower is liable. Under Irish law, companies must deduct 20% tax on interest payments.
The problem for SMEs here is that as the banks remain their largest source of funding, this tax does not apply and as such these companies may be unaware of their tax liability should this loan be sold to a purchaser outside of the banks. If your SME loan was sold on by the bank, then you as the borrower may potentially be at risk for owing additional tax and interest along with penalties owed for time passed without payment. This issue becomes a larger and more costly one when it is considered that the issue may not be known for a number of years until finances are more deeply looked into.
Tax partner at MG Partners, Aisling Donohue has said that this issue has arisen due to a “combination of bad tax laws and unfairly worded contracts” and that this could cause major issues for SMEs looking to sell their business. “An adviser doing diligence could flag this as an issue and say the SME was exposed to possible interest and penalties and this would mean the company was worth a lot less.” Donohue also stresses the importance of remembering that this applies to companies and not to individuals to avoid further concern.
If you are concerned about this and the funding status of your own SME, we would suggest contacting Revenue directly for clarification or alternatively to ask Revenue to create a provision for paying interest gross to a non-banking entity. If you have any further concerns regarding this or any other business or financial issue, please don’t hesitate to get in touch with us here at DCA Accountants.
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