Negative Interest Rates on your Corporate Deposits – What options do you have?
03 June 2021
Irish Banks are charging companies up to 1.10% for holding certain cash deposits. This is because banks have been charged for their deposits with the European Central Bank since 2014 and are passing on the impact of this to corporate customers.
How long negative interest rates are imposed on corporates (and indeed individual depositors) will very much depend on the outlook for growth and inflation in Europe. Most economic commentators forecast that we are likely to experience a low growth environment in Europe for the foreseeable future, with the European Central Bank (ECB) likely to keep interest rates negative or close to zero as the recovery from Covid-19 remains fragile.
In this scenario, many corporates will suffer losses in the value of their deposits. Added to this is the risk to the real value of long-term corporate cash – the primary threat to which is inflation.
To counteract negative interest rates, corporates will have to consider moving some of their non-working capital cash that is currently deposited in Irish financial institutions, into assets such as equities, fixed interest, alternatives and property. These type of assets can form part of a well-managed multi-asset fund that targets an appropriate level of risk to achieve long-term returns, ensuring the purchasing power of surplus cash is not eroded. At Invesco, we have always believed in the benefits of long term investment principles such as diversification and avoiding speculation.
Investing into multi-asset funds should be considered for companies who are willing to leave their cash invested for a number of years, whilst retaining a certain portion of their cash on deposit for working capital and short-term liquidity purposes.
The impact of negative interest rates on Irish corporates has led many to invest surplus funds into life assurance investment bonds. These investments attract a favourable rate of 25% tax on gains and income (exit tax), with the benefit of full liquidity and access to a wide range of investment funds that provide excellent diversification.
We have set out below some of the benefits of a corporate investing through a life assurance investment bond. This includes an illustration of the tax treatment that applies, versus holding a direct investment such as a bank deposit.
Life Assurance Investment Bonds for Companies
Where a company invests directly in a deposit, stocks/shares or direct property, any income from the investment (non-trading income e.g. interest, dividends, rent) is taxed annually at a 25% rate of corporation tax. The standard 12.5% corporation tax rate applies to trading income.
If a company is a close company, income may be subject to the close company surcharge of an additional 20%, if undistributed within 18 months after the end of the accounting period in which it arose.
However, with a life assurance investment bond, all income and gains are accumulated gross. There is a deemed disposal exit tax charge applied to any gain accumulated on each 8th anniversary and deducted from any gain realised on withdrawal, death, maturity or assignment. Since January 2012, exit tax is at a rate of 25% where the bond owner is a company. The life company is responsible for the deduction of exit tax with the balance paid to the investor (company).
Investment by a company while holding a life assurance investment bond is exempt from the close company surcharge*. The gain paid out of the investment bond should be exempt from the close company surcharge as long as it is not treated as income in the company accounts*.
Life assurance investment bonds also offer a wide range of investment options which allow companies to diversify within one structure. Investing can be done on a regular (i.e. monthly) or lump sum basis, to suit your company’s needs.
The application process for investing in a life assurance investment bond is also very straightforward. The relatively recent acceptance of digital signatures by life assurance companies has taken the hassle factor out of the application process, and made this initial task much less cumbersome.
If you are concerned about the impact negative interest rates will have on your corporate cash and want to explore other options, please do not hesitate to contact one of our experienced investment advisers.
Company Investments
| Investing through a Life Assurance Bond | Direct Investment |
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Comparison of a company investment through a life bond versus a direct bank deposit
| Life Bond Investment | Direct Bank Deposit | |
| Investment | €250,000 | €250,000 |
| Assumed Return | 2.0%**p.a. | 1.0%AER^ |
| 6 Year Gross Return | €31,540 (after charges) | €15,380 |
| Tax | €7,885 (exit tax 25%) | €3,845 (6 years corporation tax)
€3,076 (6 years close co surcharge) |
| Net Return after 6 years | €23,655 | €8,459 |
| Net Return % after 6 years | 9.45% | 3.38% |
**net of charges
^ AER is the annual equivalent rate and shows what the interest would be if compounded and paid each year.
Assumptions
Both examples assume interest rates and tax rules remain unchanged over the period.
These figures are for illustrative purposes only and are not guaranteed.
Warning: These figures are estimates only. They are not a reliable guide to the future performance of this investment.
Close Companies
Most Irish resident companies are ‘close companies’. A close company is controlled by 5 or fewer participators or is controlled by any number of participators who are directors. The definition of a close company includes a company where, on distribution of its full income, more than 50% goes to five or fewer participators or participators who are directors. A participator is a person having an interest in the income or the capital of the company.
*Companies should consult with their own professional tax advisers to confirm if this applies to them.
