The key measures impacting domestic and international corporates in Finance Bill 2021 are as follows:
- the introduction of the new interest limitation rules
- the introduction of reverse hybrid provisions
- the introduction of the digital gaming credit
- an amendment to the existing transfer pricing rules in section 835E governing certain non-trading Ireland-to-Ireland transactions
- the transposition of DAC7 into Irish tax law
- the extension of the existing scheme for capital allowances and increase in carbon tax
- technical amendment to the capital gains tax legislation pertaining to domestic mergers
- an amendment to the controlled foreign company (CFC) rules
- miscellaneous changes and technical amendments as outlined below
Analysis of the key measures
Interest Limitation Rules
The Bill provides for the introduction of the new Interest Limitation Rules in Irish tax law and it will apply for accounting periods commencing on or after 1 January 2022. The introduction of these rules, which provide for a 30% of EBITDA cap on interest deductions, follows significant engagement between the Department of Finance and stakeholders through a number of recent consultations. The rules should bring Ireland into line with other jurisdictions who have similar interest capping legislation.
While the rules do add complexity for many debt funded groups and the opportunity to relax existing interest deductibility anti-abuse rules in Irish tax legislation has been missed, they have broadly been introduced in a constructive manner. In particular, where the Irish taxpayer is part of a consolidated worldwide group for accounting purposes, the indebtedness of the overall group at worldwide level may be considered for the purposes of providing additional relief. If the Irish taxpayer has debt or interest ratios lower than the worldwide group, then its interest expense may not be restricted, or a lower restriction may apply.
Due to the complexity of the rules and their interaction with existing domestic provisions, it is recommended that debt funded Domestic and International Large Corporates consider the application of these rules and the potential impact to their tax charge in Ireland as soon as possible. Please refer to our insight on Interest Limitation Rules for further analysis.
Reverse hybrid provisions
Following the introduction of anti-hybrid rules into Irish legislation by Finance Act 2019, the Bill introduces rules with respect to reverse hybrid mismatches, in line with Ireland’s commitments to implement the EU Anti-Avoidance Directive II (ATAD II). Broadly, a reverse hybrid mismatch arises where an entity, referred to as a reverse hybrid entity, is treated as tax transparent in the territory in which it is established but is treated as a separate taxable person by some, or all, of its investors such that some, or all, of its income goes untaxed. Please refer to our insight on Interest Limitation Rules for analysis of the technical aspects of the new reverse hybrid mismatch provisions.
The new reverse hybrid provisions will take effect for taxable periods commencing on or after 1 January 2022 and Domestic and International Large Corporates should review their group structures, particularly those which include Irish limited partnerships, in order to assess the potential impact of these new rules.
The Bill also includes certain other technical amendments to the broader anti-hybrid regime to ensure the rules operate as intended.
Digital gaming credit
The digital gaming credit was announced as part of the Minister’s Budget 2022 speech and the associated legislation has been published in the Bill. Eligible expenditure incurred by a company resident in Ireland or an Irish branch of an EEA resident company in the design, production and testing stages of the development of qualifying digital games will attract a credit of 32% on the lowest of:
- eligible expenditure (i.e. the portion of qualifying expenditure that is expended on the development of the digital game in Ireland or the European Economic Area);
- 80% of total qualifying expenditure (i.e. broadly expenditure incurred by the company on the design, production and testing of a digital game); or
The digital gaming credit is subject to a minimum project spend of €100,000. As outlined above, the maximum project spend is €25 million (i.e. a tax credit of up to €8 million per project is potentially available).
In order to qualify for relief, the digital gaming company will need to go through a certification procedure with the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media, as well as meeting various other conditions, including conditions related to record keeping and ensuring that funding comes from either EU or double tax treaty partner sources.
As the credit will require EU state aid approval, it has been introduced subject to a commencement order. The relief will be provided in the form of a refundable corporation tax credit and it follows a similar approach to our existing section 481 film tax credit regime. The scheme will run until 31 December 2025 and a claim must be made within 12 months of the end of the accounting period in which the expenditure giving rise to the claim is incurred.
The digital gaming credit is a welcome move and looks to support one of Ireland’s fastest growing domestic and international sectors to ensure that they are positioned for success in a post COVID-19 economy.
Transfer Pricing rules (section 835E TCA 1997)
The Bill includes a complete redrafting of the existing transfer pricing rules in section 835E, which governs certain non-trading Ireland-to-Ireland transactions. The amendments included in the Bill are a welcome development for Domestic and International Large Corporates and it is envisaged that the provisions will be significantly more straightforward to apply and more commercially focused than the existing rules. The general principle underlying the revised section 835E is that, where both the supplier and acquirer are Irish resident and chargeable to tax on their profits (or would be chargeable but for section 129), then the exclusion from transfer pricing should be available, subject to certain anti-avoidance measures, including a bona fide test to prevent misuse of section 835E in non-bona fide situations. There has been significant engagement and consultation with the Department of Finance and with Revenue in relation to the application of section 835E and the new provisions are a positive development in the design and implementation of a measure to improve the tax neutrality of Ireland to Ireland transactions.
DAC 7 - Mandatory Exchange of Information for Digital Platform Operators
The Bill provides for the transposition of new EU tax transparency rules for digital platform operators (DAC7) into Irish law.
The new rules aim to provide EU Member States’ tax authorities with the information necessary to ensure the enforcement of tax rules regarding commercial activities performed with the intermediation of digital platforms and to introduce standardised reporting requirements that should reduce the administrative burdens on the digital platform operators. The new reporting obligations will apply to operators of EU and non-EU digital platforms that allow certain sellers (“reportable sellers”) to be connected to other users in order to perform the following (cross-border or domestic) activities: a) the rental of immovable property; b) the provision of personal services; c) the sale of goods; and d) the rental of any mode of transport. The information to be reported will include information relevant to the correct identification of the seller and information relevant to the determination of the profits realised by the seller through the platform. DAC 7 will take effect from 2023 onwards.
The Government's commitment to tackling climate change was emphasised in the Minister’s budget speech and a number of climate change measures were introduced in the Bill. Of note for Domestic and International Large Corporates, the existing scheme for accelerated capital allowances for energy efficient equipment has been extended to certain hydrogen powered vehicles and refuelling equipment and there has been an incremental increase to the current rate of carbon tax, in line with the trajectory for increases outlined in Finance Act 2020.
There are two technical amendments relevant to mergers included in the Bill which are welcome and they should remove technical ambiguity.
With respect to domestic mergers, the Bill includes a new section such that a domestic merger by absorption, pursuant to the Companies Act 2014, is put on the same statutory footing as a cross-border merger. As a result of this amendment, where a company transfers all its assets and liabilities to its 100% parent as a consequence of a domestic merger, it shall not be treated as giving rise to a disposal by the parent of the share capital it holds in the company.
The Bill also provides for helpful technical clarifications with respect to cross-border mergers.
The Bill includes an amendment to the CFC rules such that a number of exemptions will be disapplied with respect to CFCs resident in a jurisdiction listed in Annex I of the EU list of non-cooperative jurisdictions for tax purposes. The disapplied exemptions are the effective tax rate, low profit margin and low accounting profit exemptions. With respect to CFCs resident in non-cooperative jurisdictions with accounting periods beginning during the period from 1 January 2021 to 31 December 2021, the EU list published in October 2020 applies. The Bill provides that the list, as updated in October 2021, will apply for accounting periods beginning on or after 1 January 2022.
We recommend that all Irish resident Domestic and Large Corporate groups review the potential impact that this change might have from a CFC perspective.
There were a number of changes to various anti-avoidance provisions, including those in respect of dividends paid out of certain profits and interest on certain loans.
The Bill amends section 840A, which is an anti-avoidance provision that denies a tax deduction for interest on certain loans between connected parties used to acquire assets from connected companies. The amendment provides that the restriction applies to interest on promissory notes and other agreements or arrangements having a similar effect. The amendment also specifies that a tax deduction is denied for interest on any form of refinancing such a loan.
The Bill also includes a welcome amendment to section 129A, an anti-avoidance provision that removes distributions between Irish tax resident companies from the scope of section 129 (i.e. from being treated as exempt franked investment income). As a result of the amendment, where a company pays an interim dividend out of profits arising in an accounting period in which the company is Irish resident, a portion of such distributions will not be deemed to have been earned before the company was resident in Ireland.
Directive on Administrative Cooperation (DAC6) and Directive (EU) 2016/2258 (DAC5)
The Bill includes certain amendments to the legislation transposing DAC6 which provides Irish Revenue with powers of enquiry into compliance by intermediaries and taxpayers with respect to their obligations under DAC6.
The Bill also provides for the final transposition of DAC5, which requires that Irish Revenue have access to certain data collected for anti-money laundering and terrorist financing activity.
We are here to help you
Finance Bill 2021 contains many important changes that will have implications for large domestic and international corporations. We are available to assist you with any queries you have on how they could impact your business.