From a financial services perspective, the key measures introduced in the Bill include the following:
- Amendments to clarify the tax treatment of foreign currency.
- A number of minor clarifications to the Interest Limitation Rules, which align legislation with guidance.
- Additional reporting requirements for certain regulated products.
- Some significant financial services-related VAT changes.
- Stamp duty changes, which include a change to the rules linked to the electronic transfer of shares, as well as minor changes to the administration of levies.
- Additional measures, including clarification relating to the taxation of unit trusts and the operation of the Employment Investment Incentive.
Foreign currency: computation of income and gains
Section 79 TCA 1997 (Section 79) provides that foreign exchange movements on ‘relevant monetary items’ are, for corporation tax purposes, to be treated as part of profits or losses of a company’s trade rather than treated as capital gains or capital losses. Section 31 of Finance Bill 2022 proposes an amendment to Section 79 that is said in the Explanatory Memorandum to the Bill to be an expansion of the definition of ‘relevant monetary item’ to include both trade debtors and trading bank accounts with the aim of allowing foreign exchange gains or losses in respect of those items to be treated as part of trade profits or losses. Such items are often potentially capable of being so treated under first principles and under certain interpretations of the existing version of Section 79. As such, the proposed amendment could be viewed as a clarification measure. Whilst the amendment is welcome, if the measure is to put the treatment of trade related bank accounts beyond doubt and to achieve the aim as stated in the Explanatory Memorandum, then committee or report stage amendments are likely to be necessary to address some potential shortcomings in its scope as currently drafted.
Interest Limitation Rules
The Bill proposes a number of clarifying amendments to bring the legislation in line with guidance previously issued by Revenue, which are welcome for the financial services industry.
It also includes an update on the operation of the exemption for interest on legacy debt, to specify that a “first-in-first-out” basis applies where there is a repayment in respect of facilities that have a mixture of legacy debt and non-legacy debt. Taxpayers with legacy debt should consider the impact of this more restrictive approach.
The extension of the definition of long-term infrastructure projects to include large-scale residential projects is a welcome development that could increase the attractiveness of investment in this sector. Refer to our corresponding property insight for further detail.
Additional reporting requirements for certain regulated products
The Bill provides for additional annual reporting requirements for exempt unit trusts (EUTs), common contractual funds (CCFs) and investment limited partnerships (ILPs).
As EUTs, CCFs and ILPs are not currently required to submit accompanying financial statements, Irish Revenue has no standard visibility on the type of investments held within these funds. The intention to update the reporting requirements to capture this high-level detail would be less of an administrative burden on filers in comparison to facilitating the submission of tagged financial statements.
The additional reporting requirements are broadly minimal, with the exception of reporting detail on the nature of assets held by the fund during the year of assessment confirming the fund’s investment strategy.
The Bill also provides for the introduction of a €3,000 penalty where the management company of a CCF or the partners of an ILP fail to submit an annual statement or submit an incomplete or incorrect annual statement. This brings it in line with the current regime applicable to EUTs.
VAT and financial services
Section 110 companies
VAT legislation currently provides that the management of an undertaking that is a qualifying company for the purposes of Section 110 of the Taxes Consolidation Act 1997 is VAT exempt. The Finance Bill provides that, from 1 March 2023, this VAT exemption will not apply to Section 110 companies that hold plant and machinery. As a result, the management of a Section 110 company that holds aircraft would be taxable. This change should not cause any issues for the aircraft industry as typically, Section 110 companies that hold aircraft are engaged in fully VATable activities and can therefore deduct any VAT incurred on a management charge. Notwithstanding this, there could be an irrecoverable VAT cost arising where the Section 110 holds financial assets and also aircraft as VAT recovery would be restricted.
Management companies that are currently providing exempt management services to Section 110 companies would need to review their supplies and determine whether the exemption is still applicable. Such companies could see an increase in VAT recovery and therefore, a lower cost of providing their services where the exemption no longer applies.
EU funds
Under existing Irish VAT legislation, the management of certain financial funds—including Undertakings for the Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIF)—as defined under Irish legislation, is VAT exempt. The Finance Bill extends this exemption to equivalent funds (UCITS and EU AIFs) authorised by the competent authority of another EU Member State.
This measure will negatively impact on the VAT recovery position of Irish fund managers and administrators that currently treat the management of non-Irish EU-based funds as taxable services outside the scope of Irish VAT, with full VAT recovery on related costs incurred. Following this amendment, VAT on costs incurred in relation to the management of such funds would not be deductible.
Agency services
Irish VAT legislation currently provides that agency services in respect of the management of certain qualifying funds (e.g. UCITS) are VAT-exempt. The Finance Bill includes provisions to remove this exemption, bringing Irish legislation in line with the EU VAT Directive.
Stamp duty amendments
Electronic transfer of shares
The Bill contains an ostensibly benign change to the rules for stamp duty on electronic transfers of shares, but the change could have broader implications. Currently, stamp duty on electronic transfers of shares through securities settlement systems only applies to transfers of interests in “dematerialised securities”. The proposed change is that stamp duty will now instead apply where “an interest in securities is transferred by electronic means”. This raises a concern that certain electronic transfers of Irish shares that are not currently treated as stampable by the Revenue Commissioners (e.g. shares held in settlement systems other than Euroclear Bank Belgium and CREST) could now be subject to stamp duty. Transfers of Irish shares quoted in the US, which are settled in DTC, should not be impacted by this provision as the exemption for transfers of “American Depositary Receipts” should still apply to such shares.
Bank and insurance levies
The Bill also contains minor amendments to the provisions included in Finance Act 2021 for the modernisation of banking levies, which were to be subject to commencement orders. The modernisation provisions will now commence on 1 January 2023, but with carve-outs permitting the current system to continue to 31 January 2023 for levies on cash/combined cards and to 31 January 2024 for the levies on credit/charge cards. The definitions of credit institutions and financial institutions for the purposes of these levies are also to be amended.
Provisions for the modernisation of the system for collecting levies from authorised health insurers are also contained in the Bill.
Additional measures relevant to financial services
Offshore fund clarification
The Bill provides clarification that an authorised unit trust, the general administration of which is carried on in Ireland, will not be treated as an offshore fund solely where its trustee is resident in another EU/EEA Member State and provides its trustee services through an Irish branch.
Qualifying investors and the Employment Investment Incentive
For the purposes of the Employment Investment Incentive, an individual will not be a qualifying investor if that individual (or an associate of the individual) is connected with the company.
The Bill includes an amendment that disapplies the connected person rule in respect of persons who are partners solely as a result of being partners in a partnership constituting a qualifying investment fund.
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We would be happy to discuss the implications of Finance Bill 2022 for your business. Please reach out to the PwC Financial Services Tax team for any help you require. Contact us today.
