Recent changes to Section 110 Revenue Guidance

Can you explain the purpose of the “double trade” test and how it works. In your response, can you also outline recent guidance under Section 110: entitlement to treatment.

Michelle Adams, Manager, Financial Services Tax: In accordance with Section 110 TCA 1997, qualifying companies compute their profits in accordance with the provisions applicable to Case I. When looking at several provisions within the Tax Acts which are applicable to Case I, some specifically apply to Case I, such as Section 81 TCA 1997, and some specifically apply to a trade, such as Section 76D TCA 1997. This caused confusion on whether the provisions which applied to a trade would be applicable to a Section 110 company. Revenue provided further guidance and included within the Section 110 Tax and Duty Manual (i.e. Part 04-09-01), that their position would be that “trade” and “Case I” should be generally used synonymously throughout the Tax Acts. This removed any uncertainty when applying the provisions which state “trade” or “Case I”.

However, shortly before Christmas, the Revenue guidance was updated to “provide clarification on the “double trade test”. The Revenue guidance now notes that there are provisions within the Tax Acts which apply a “double trade” test, specifically calling out section 452(2)(a)(ii) as an example of same. The meaning of the “double trade test” would be where there is a requirement for the company to be carrying on a trade and the specific expense/income would be as a result of this trade. For example, Section 452 TCA 1997 refers to “a trading expense in computing the amount of a company’s income from the trade”.

The Revenue guidance states that in order for these provisions to apply, a qualifying company must ensure that the income/expense is in itself of a trading nature. It is not sufficient to rely on the “Case I” basis of calculation of a qualifying company alone, to meet the “double trade” test.  

The introduction of “double trade test” concept into the Section 110 guidance means that practitioners must consider the trading nature of a Section 110 company. This is the first time a distinction between a trading Section 110 company and a non-trading Section 110 has arisen. During TALC discussions, Revenue confirmed that in determining the trading status of a qualifying company the usual criteria (i.e. Badges of Trade) apply.

Content adapted from Finance Dublin’s Irish Tax Monitor.

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