Ireland published Finance Bill 2021 (the “Bill”) on 21 October 2021.
Most notably, the Bill includes provisions to implement the interest limitation rules and anti-reverse hybrid rules arising from the EU Anti-Tax Avoidance Directive (“ATAD”).
The Bill also helpfully amends the transfer pricing exemption for Irish-to-Irish transactions, introduces new rules for the attribution of branch profits based on the authorised OECD approach, and a new digital gaming credit regime. The Bill also includes a number of technical amendments to the current Irish anti-hybrid rules and transposes DAC7 (imposing reporting obligations for certain digital platforms) into Irish law.
We have summarised some of the key changes below:
Interest limitation rules
In line with obligations under ATAD, the Bill implements new interest limitation rules (“ILR”).
The new ILR limits the maximum tax deduction for net borrowing costs to 30% of EBITDA for companies within the scope of the legislation. The ILR does not apply to net borrowing costs below the €3 million de minimis threshold set out in ATAD. There are also exemptions for standalone companies, legacy debt (the terms of which were agreed before 17 June 2016) and for certain long-term infrastructure projects. The ILR also includes an option for companies to operate the rule on a single entity or local group basis and for certain group reliefs to apply where the Irish taxpayer is part of a consolidated worldwide group for accounting purposes (by applying an equity ratio rule or a group ratio rule). Also any disallowed interest may be carried forward to a tax year in which interest capacity is available. Surplus interest capacity in an accounting period can be carried forward for up to five years.
The ILR will apply for accounting periods beginning on or after 1 January 2022.
Implementation of ATAD Anti-Reverse Hybrid Rules
In addition to the technical amendments to Part 35C TCA, the Bill also implements new anti-reverse hybrid rules, in line with Ireland’s obligations under Article 9a of ATAD. The approach adopted in the Bill reflects industry feedback to the Department of Finance’s consultation on the implementation of the rules.
The new rules will tax income in Ireland that would otherwise go untaxed because the relevant Irish entity (eg, an Irish partnership) is regarded as tax transparent in Ireland, but tax opaque in the territory of a participator. In this context, the Bill proposes that certain entities which would be viewed as tax transparent in Ireland are brought within the scope of Irish tax where:
(i) the entity is 50% or more owned or controlled by entities that are resident in a jurisdiction that regard it as tax opaque; and
(ii) as a result, a mismatch occurs.
Under the new section 835AVD TCA, a reverse hybrid mismatch outcome will arise where some or all of the profits or gains of a reverse hybrid entity are not subject to Irish tax or foreign tax. The mismatch is neutralised by imposing a charge to Irish corporation tax on the reverse hybrid entity in respect of such profits and gains. Importantly, the Bill provides that a reverse hybrid mismatch outcome should not arise in respect of any profits or gains of a reverse hybrid entity that are attributable to a relevant participator that is:
(i) exempt from tax in the territory in which it is established;
(ii) established in a territory that does not impose tax; or
(iii) established in a territory that does not impose tax on income or profits derived from abroad.
The new rules also incorporate certain exclusions facilitated under ATAD. In particular, there is an exemption for “collective investment schemes”, which includes regulated Irish investment funds. In order for a collective investment scheme to fall within the scope of the exemption, it must be (a) widely held, and (b) hold a diversified portfolio of assets.
The rules will apply with effect from 1 January 2022.
Amendment of the Anti-Hybrid Rules
The Bill introduces a number of technical amendments to Part 35C TCA (which implemented the ATAD anti-hybrid rules) including an amendment to the definition of an entity to ensure greater conformity with ATAD. This definition now includes “any other legal arrangement of whatever nature or form, that owns or manages assets, that is subject to any of the taxes” covered by the anti-hybrid provisions. Also, Section 835AB TCA which addresses the application of the anti-hybrid rules in the context of worldwide tax systems (to ensure that the rules only operate to neutralise actual economic hybrid mismatches and not technical hybrid mismatches) is extended by the Bill to cover additional fact patterns, including certain payments involving individuals.
The Bill proposes to clarify and broaden the scope of the existing exemption from transfer pricing rules for certain Irish-to-Irish transactions.
As discussed in our March update, the current exemption had given rise to certain interpretive difficulties for taxpayers and practitioners alike, particularly in the context of transactions where no consideration was payable. Although certain amendments to the existing legislation were due to be introduced by Finance Act 2020 to address some of these interpretive issues, these amendments were never fully enacted and will now be superseded by the updated proposals in the Bill.
The Bill now proposes to address the issues by more clearly delineating the scope of the exemption, including in the context of transactions where no consideration is payable. The proposed amendments should result in a wider range of transactions benefiting from the exemption, provided the conditions of the legislation are satisfied. These conditions include a requirement that the transaction must be entered into between Irish-resident taxpayers otherwise than in the course of a trade carried on by them.
The amendments are proposed to take effect for accounting periods commencing on or after 1 January 2022 and, unlike last year’s Finance Act, are not subject to a ministerial commencement order.
The Bill should provide welcome certainty to taxpayers and practitioners regarding the application of the Irish-to-Irish exemption.
Attribution of profits to a branch – application of OECD approach
The Bill inserts a new section 25A TCA to provide for the application of the authorised OECD approach to the attribution of income to branches of non-resident companies in Ireland. In accordance with the OECD guidance, the relevant branch income which is attributable to a branch is the amount of income it would have earned if it were an independent and separate enterprise. This amendment essentially codifies the requirement to comply with OECD guidance and also introduces prescribed documentation requirements for the purpose of ensuring relevant branch income has been computed in line with such guidance. Penalties will apply for taxpayers who fail to provide relevant branch records to Revenue. This new section will come into effect for accounting periods commencing on or after 1 January 2022. SMEs will come within the scope of the new provision subject to Ministerial Order.
Section 79 of the Bill inserts a new section 891I TCA to transpose DAC7 into Irish law. DAC7 introduces new reporting obligations for certain digital platform operators. As discussed in our April update, the digital platform operators affected are those that provide a platform for the sale of goods, the rental of immovable property, the provision of personal services, and the rental of any mode of transport. Operators of these platforms will be required to collect and verify certain information on the sellers using their platforms and report it to the relevant tax authorities. The information will then be automatically exchanged with the tax authorities of other Member States. The section is subject to a Ministerial Order. DAC7 will take effect from 2023 onwards. It is intended that the remaining aspects of DAC7 will be transposed in Finance Bill 2022.
Digital gaming credit
As announced in the Budget, the Bill introduces a new refundable corporation tax credit for the digital gaming sector. The relief will be available at a rate of 32%, on eligible expenditure of up to a maximum limit of €25 million per project (ie, tax relief of up to €8 million). Eligible expenditure includes expenditure on the design, production and testing of a digital game. A ‘digital game’ is a game which (a) integrates digital technology; (b) incorporates at least three of the following: text, sound, still images, and animated imagines, and animated images; (c) is capable of being published on an electronic medium; and (d) is controlled by software enabling the person playing the game to interact with the dynamics of the game.
A claim for the tax credit can only be made in respect of a digital game which has been issued with a cultural certificate from the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media. As State Aid approval is required from the European Commission before the introduction of this regime, it will be introduced on the issuance of a further commencement order.
Non-resident corporate landlords in receipt of Irish rental income are currently subject to income tax (at the rate of 20%). From 1 January 2022, such non-resident landlords will be subject to corporation tax, which will result in an increase in the applicable tax rate from 20% to 25%. These rules are being introduced so that non-resident corporate landlords will be in the scope of the ILR.
Domestic mergers by absorption – capital gains tax
The Bill includes a new 617A TCA to confirm that a domestic merger by absorption does not give rise to chargeable gains. Accordingly, in line with the legislation in place for EU cross border mergers, the parent company is not viewed as disposing of the share capital held in the subsidiary before the merger. This removes the need to rely on the substantial shareholders exemption to avoid a charge to CGT in the case of a domestic merger by absorption.
The Bill will be debated in the Houses of the Oireachtas (the Irish parliament) and it is likely that other amendments will be made during that process. The final text is expected to be passed into law before the end of 2021. We will keep you updated on significant developments. In the meantime, if you would like further details on the Bill or how it applies to your business, please speak to your usual Matheson contact or to any of our Tax Partners.