Tax Implications of Debt Forgiveness

May 7, 2013

The Finance Act has set down that Capital Acquisitions Tax (otherwise known as gift tax) will not apply to debt written off under the formal terms of a personal insolvency arrangement. However it has been unclear what the situation was with regard to those who enter into a debt write down with a financial institution which is outside the scope of a formal insolvency arrangement.

Revenue have now clarifies that where a financial institution enters into a debt restructuring, forgiveness or write down arrangement with a customer, revenue’s approach, subject to being satisfied as to the bona fides of the arrangement is that the financial institution is not intent on making a gift of any sort to the debtor and accordingly the debtor will not be subject to a CAT charge.

This approach will only apply where the debt arrangement was for bona fides commercial reasons and it may be subject to revenue audit or enquiry. Any arrangement deemed to be undertaken for the purposes of the avoidance of tax will not come under the scope of the above treatment and will be deemed subject to CAT at 33%.

Should require any further information or clarification regarding the foregoing, please do not hesitate to call your usual contact partner.