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Matheson Tax Update: Ireland publishes Finance Bill 2013
AUTHOR(S): Turlough Galvin, Gerry Thornton, Joe Duffy, Aidan Fahy, Shane Hogan, John Kelly, Greg Lockhart, Alan Keating, Mark O’Sullivan, John Ryan, Catherine Galvin
PRACTICE AREA GROUP: Tax, Structured Finance and Derivatives
The Irish Finance Bill was published yesterday afternoon (13 February 2013). Although it contains a number of technical changes that would potentially have an impact upon our international companies and financial institutions clients doing business in and through Ireland, the changes are not terribly drastic and in most cases are positive. A quick overview of the most relevant changes is as follows:-
As has been previously announced, Ireland was one of the first countries in the world to conclude an Inter-Governmental Agreement with the United States in relation to FATCA. The Finance Bill provides for the ratification of this Agreement and also includes provisions to enable the Revenue Commissioners to make regulations providing for the collection of necessary information from financial institutions and for the exchange of such information with the United States. These regulations are expected to be published over the coming months.
Real Estate Investment Trusts
As has also been previously announced, Ireland is introducing a tax regime for Real Estate Investment Trust (REIT) companies. It is hoped that the introduction of REITs will attract foreign investment into the Irish real estate market and establish Ireland as a hub for the management of international real estate. The Finance Bill sets out the tax legislation that will underpin the REIT companies.
Subject to certain criteria, including a requirement to distribute 85% of its property income by way of dividend, the REIT will be exempt from tax in respect of the income and chargeable gains of a property rental business. The REIT must derive 75% of its aggregate income from this property rental business. It may carry on other “residual” business, but the tax exemption applies only to the income and chargeable gains of the property rental business. Dividends paid by the REIT will be subject to dividend withholding tax (unless exempted under one of Ireland’s 68 tax treaties), and will be taxable in the hands of the shareholders.
Investment Limited Partnerships
Irish Investment Limited Partnerships (ILPs) are a form of regulated Irish fund. Historically, ILPs have been rarely used, partly because they have not been treated as tax-transparent, as normal partnerships would be. The Finance Bill amends the tax treatment of ILPs to ensure that they are tax-transparent. This change is expected to allow the Irish regulated funds sector to compete globally to attract new business lines to Ireland following the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in 2013.
The legislation relating to the issuance of Islamic finance and other structured instruments is being enhanced and the stamp duty treatment applying to the redemption of debt securities by Irish SPVs has been clarified and improved.
Double Tax Agreements & Information Exchange Agreements
The Finance Bill completes the ratification process for three new double tax agreements (with Egypt, Qatar and Uzbekistan); for a protocol to the agreement with Switzerland; and a Tax Information Exchange Agreement (TIEA) with San Marino. It also amends provisions relating to the Joint Council of Europe / OECD Convention on Mutual Assistance in Tax Matters.
Intangible Asset Regime
The existing Irish Intangible Asset regime provides for capital allowances in respect of expenditure on the acquisition of certain forms of intellectual property assets but contains a clawback of capital allowances if the assets are disposed of or cease to be used in a trade within 10 years of acquisition. The clawback period is reduced to within 5 years of acquisition under the Finance Bill.
Aviation Services – Capital Allowances
The Finance Bill applies industrial building allowances to hangars, tear down pads, parking and ancillary facilities and also provides for an accelerated capital allowance scheme over seven years in relation to construction or refurbishment of certain buildings or structures used in connection with the maintenance, repair or overhaul of commercial aircraft.
Foreign Tax Credit
In a welcome development, the Finance Bill introduces an additional credit for tax on certain foreign dividends received from subsidiaries resident in EU/EEA countries. This provision is a reaction to the ruling of the Court of Justice of the European Union in the “Test Claimants in the FII Group Litigation case”. In this case, the Court held that UK rules differentiating between nationally-sourced and foreign-sourced dividends could result in foreign-source dividends being subject to taxation at a higher level than UK-source dividends and were, therefore, in breach of European Union law.
Similar to the old UK rules considered in the FII Group Litigation case, Ireland's existing rules provide credit only for the foreign tax actually paid on the profits underlying the distributed dividends (ie, the effective foreign tax rate rather than the nominal foreign rate). The new "additional credit" allows for increased double taxation relief when the credit calculated under Ireland's existing rules is less than the amount of credit that would be computed by reference to the nominal rate of tax in the country from which the dividend is paid.
The total credit under the new regime (ie, including the additional credit) cannot exceed the Irish corporation tax attributable to the dividend and there are limitations on pooling and carry forward by reference to the additional credit. The amendment is stated to apply to all dividends paid on or after 1 January 2013.
The proportion of time that key employees must spend solely on R&D activities in order to qualify for the Research & Development tax credit surrender regime is being reduced from 75% to 50%. The Foreign Earnings Deduction scheme, which provides for a tax deduction, subject to certain conditions, for individuals who carry out the duties of their office or employment in BRICS countries is being extended to include Algeria, the Democratic Republic of the Congo, Egypt, Ghana, Kenya, Nigeria, Senegal and Tanzania.
We will circulate more detailed updates in relation to some of the above topics as the Finance Bill progresses. If you have any questions, please contact any of the partners in the Tax Group in Matheson.