Refinancing after 'deemed sale' from LTC

Our Experts Answer:

Standard closed companies enjoy automatic interest deductibility provisions but the old LAQC and new LTC entities will need to apply the traditional rules of deductibuility to any interest costs. The IRD has issued some guidelines that offer some assistance. Essentially, it is reasonable to refinance "contributed capital" that shareholders have previously lent the companies. In the case of a LTC this could also include realised capital gains that remain in the company. However, money borrowed to distribute dividends from unrealised asset revaluations does not give rise to deductions for the resulting interest costs. So to determine the extent to which you can refinance you will first need to calculate your level of contribute capital in your shareholder current accounts. This should be calculated after the impacts of the related party sale transaction you are contemplating. You accountant can probably assist by projecting this position for you once all the facts are known.