Territorial regime
While the Act does not include legislation to introduce a territorial system of double tax relief, the Department of Finance has confirmed its intention to introduce a participation exemption for foreign dividends in Finance Act 2024. A consultation process is currently ongoing. The introduction of a foreign branch profits exemption remains under consideration.
This, coupled with the other positive and business-friendly provisions which are included in the Act, including outbound payments and amendments to the Employment Investment Incentive relief for Qualifying Investment Funds, signals a positive direction of travel for the sector.
Pillar Two
The draft legislation issued today has seen many welcome changes since the draft legislation included in the second Feedback Statement earlier in the summer.
Although Ireland has moved slightly beyond the scope of the OECD and EU Directive rules by introducing the concept of a QDTT that applies to standalone entities (i.e. non-consolidating entities) which breach the €750 million threshold themselves, helpfully the rules have carved out standalone “investment entities” (as defined).
The Act also appears to remove the application of the QDTT to investment entities that are members of a consolidated group. This maintains consistency of treatment with the IIR and UTPR collection mechanisms, which ensure the maintenance of existing tax neutrality by preventing a top-up tax applying to the investment entity itself.
Today’s amendments reflect the result of an effective collaborative consultation process. The resulting proposed legislation assists in the continued development of Ireland’s competitive funds industry while also implementing Pillar Two in line with the requirements of the OECD and EU Directive.
Importantly, Ireland has implemented legislation which reflects that OECD Guidance should be considered alongside the Irish legislation. Therefore where subsequent OECD Guidance reflects a conflicting position to existing Irish legislation, the OECD Guidance should be followed, unless it conflicts with the EU Directive. This may be important for a number of areas, including the substance-based income exclusion in the aircraft leasing sector.
Outbound payments
Following the public consultation earlier in the year, the Act includes new measures on the tax treatment of distributions, royalties and interest payments to recipients who are associated entities in jurisdictions on the EU list of non-cooperative jurisdictions and zero-tax jurisdictions.
From a financial services perspective, the draft legislation contains a number of welcome amendments to the proposals contained within the July Feedback Statement.
The definition of “associated entity” for this purpose departs somewhat from the current definitions of “associated entity” in Irish legislation. In summary:
there is a 50% ownership interest test;
there is no financial statements consolidation test in the proposed definition; and
the “significant influence” test in other areas of Irish tax legislation is replaced by a “definite influence” test. The definition of “definite influence” appears to be a higher threshold than that of “significant influence”.
In a financial services context, many outbound payments will be made to multi-tiered and widely held flow-through structures. In this regard, it is positive that the Act includes a “reasonable to consider” test in implementing the “excluded payment” definition. A similar provision also applies to the assessment of the “associated entity” test in certain scenarios linked to the payment of interest which will be welcomed in the public deals market.
In addition, it is very positive that the definition of an "excluded payment" includes certain payments to certain tax exempt entities resident in a territory other than a "specified territory".
Provisions also exist to facilitate a look-through approach in certain cases where the payments are made to an entity but the relevant payment is treated as arising or accruing to another entity which will be helpful for transparent or flow-through structures.
Leasing technical amendments
There have been a number of complex changes of relevance to the leasing sector. This follows significant involvement and dialogue by various stakeholders in the broader leasing industry with Revenue and the Department of Finance over the last number of years.
The Act attempts to deliver a number of changes which will impact lessors and lessees, many of which are welcomed. Changes to Section 403 are helpful in clarifying the operation of that Section, in particular updates which have been made to ensure the legislation is more reflective of the commercial reality of a modern leasing business. While changes to Section 299, which provides a lessee with an ability to claim capital allowances in certain cases, appear to address some existing issues with that Section, there is still some work to be done to tidy this up. The more fundamental changes to Section 76D are complex and require detailed consideration. Initial concerns include a seemingly worrying divergence from a path where taxpayers have been following the accounting treatment, in particular for operating leasing together with a further introduction of additional levels of administration, not long after the onboarding of complex interest limitation rules which have resulted in material levels of additional compliance burden for taxpayers. At first glance, the outcome of much of this compliance may in fact be neutral. But together with new definitions of leases that do not mirror accepted accounting concepts, taxpayers are once again facing more complex reporting.
There remain some aspects of the overall taxation framework for leasing in Ireland however, that have not been dealt with in the Act including trading guidance and the taxation of asset disposals. Taxpayers will have a legitimate expectation that clarity is provided by way of guidance on these matters by the end of year.
Qualifying financing companies
The introduction of a new regime for non trading financing companies has long been sought and is a very welcome addition. Some further work may need to be done on some technical aspects of this legislation but it represents a new structure to facilitate the provision of external debt into a group where there are certain commercial restrictions or difficulties in lending directly to the end user.
Given the Minister signalled in the Budget speech that a broader review of Ireland's interest deductibility rules would be conducted next year, it is therefore very positive to see an ability to get an interest deduction in a Case III/Case IV context being introduced.
Technical amendments to the anti-hybrid and anti-reverse hybrid rules
The Act provides for some technical amendments to the anti-hybrid rules introduced in Finance Act 2019 and the anti-reverse hybrid rules introduced in Finance Act 2021.
The definition of “entity” for the purpose of the anti-hybrid rules will be amended to include any legal arrangement, of whatever nature or form, that is within the charge to tax, whereas this leg was previously limited to legal arrangements that own or manage assets.
Minor technical amendments have also been proposed to clarify the operation of the anti-reverse hybrid rules and their application to collective investment schemes during their start-up and wind-down phase to bring legislation in line with published Revenue guidance.
Employment Investment Incentive (EII) relief for Qualifying Investment Funds (QIFs)
The Act, which implements the new State Aid GBER rules, provides that EII relief shall not apply to shares in a company that carry preferential rights to a dividend or to repayment of capital on a winding up. However, the Act provides that this anti-avoidance amendment shall not apply in circumstances where the shares are issued to the managers of a QIF (being an ILP or a limited partnership managed by an AIFM).
FATCA/CRS
The Act provides for amendments to the legislation relating to CRS, DAC2 and FATCA to ensure Revenue has the ability to apply penalties in the case of reporting financial institutions that are structured as partnerships or trusts (including trusts that qualify as investment undertakings), whereby the penalties may be applied to a “liable person”, such as the precedent partner (in the case of a partnership) or the trustees or management company in the case of trusts. To date, penalties might otherwise not apply in the case of such financial institutions without legal personality.
The Act also provides the framework for joint audits and clarifies Revenue powers in making enquiries into inaccurate returns or failure to make returns under DAC6.
Additional measures relevant to financial services
Further levy on certain financial institutions
The Act also contains amendments to the provisions for the operation of banking levies. The changes propose that the levy will apply to the total value of the relevant deposits held by a financial institution in the base year (relevant base year is 2022 for 2024). Tax at a rate of 0.112% will apply to these deposits. This is a change to the previous levy which was based on the total amount of DIRT paid.
The application of the new levy is limited to certain prescribed persons who are named in the Act. Notably, AIB, EBS, Permanent TSB and Bank of Ireland. The levy for 2024 will be due to be paid in October 2024.
Provisions applicable to credit institutions
The Act contains minor amendments to a number of provisions impacting financial institutions relating to information reporting and certain Revenue powers to remove the definition of “credit institution” from “financial institution” as credit institutions are already covered by other parts of the definition.
Distributions to non-resident pension schemes
Included in amendments that align the dividend withholding tax rules (and related income tax provisions) with EU law is an amendment that extends the exemption from dividend withholding tax and income tax to distributions made to non-resident pension schemes.
Stamp Duty
The Act includes the provision of an exemption for any electronic transfers of interests in Irish shares within central securities depositories in the US and Canada, where those shares are dealt in on a recognised stock exchange in either of those countries. The inclusion of the exemption simplifies the administrative burden on taxpayers and is a welcome amendment.
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