1. Participation Exemption

Background and overview

Ireland currently operates a worldwide corporate tax system. A worldwide regime considers all profits, both domestic and foreign source of a resident entity to be within scope of taxation. An Irish resident company is generally taxable on distributions from a foreign subsidiary and a credit may be available for underlying taxes or withholding taxes in the payee jurisdiction.

The Bill introduces a new (“territorial”) system which will be applicable for dividends and certain other distributions received by Irish resident companies from 1 January 2025. The new rules operate by exempting such income received by an Irish tax resident company from corporation tax. The introduction of the participation exemption follows two separate public consultations held by the Department of Finance in 2024.

There are a number of conditions which need to be met to qualify for the exemption and there are also some exclusions from the exemption which apply in certain circumstances. These are outlined in detail in the appendix to this alert. Broadly speaking the exemption applies to dividends and other distributions received by Irish parent entities from subsidiaries in tax treaty partner jurisdictions.”

Claiming the exemption

A parent company will have the option to claim the participation exemption or to continue to use existing tax-and-credit system. The claim for exemption is via the company’s annual corporation tax return. Where a company elects to claim the participation exemption for an accounting period, this exemption will automatically apply to all distributions that are in scope of the exemption. Where the election is made, the parent company will not be entitled to claim double tax relief with respect to taxes in the other jurisdiction on exempted distributions.

Impact for Financial Services (‘FS’)

The new participation exemption is undoubtedly a welcome development for the FS industry and will improve Ireland’s attractiveness more generally as a holding company location for larger groups. It will also remove the (sometimes) significant burden of administering the “tax and credit” approach noted earlier for dividends. However, taxpayers will need think through the impact of claiming this exemption in detail, as it will impact on all distributions received which are in scope of the exemption for the period in question. As noted above, claiming the exemption does “turn off” any access to double tax relief on such distributions under Irish domestic rules.

It is important to highlight that s.110 companies which hold shares in foreign subsidiaries do not qualify for this exemption. This is not unexpected; the previously issued Feedback Statement was also drafted on the basis s.110 companies would not qualify. This will somewhat limit the practical impact of the new rules from an FS perspective given s.110 companies are commonly used in FS structures and transactions and do in certain cases hold shareholdings in foreign subsidiaries as part of their securitisation business.

3. Leasing Changes

Changes in the Bill related to leasing are (in the main) focused on clarifying/amending certain items included in last year’s Finance Act (which included significant changes from a leasing perspective). The most significant amendment relates to finance leases. Last year’s Act included specific requirements to qualify for “financing treatment” (in other words; for the lessor to be taxed on the financing margin inherent in the finance lease). One specific condition placed a significant burden on the lessor with regard to their knowledge of the tax treatment in the lessee location (even in a 3rd party scenario).

The changes in the Bill address this and make a clear distinction between finance leases to associated entities (an “associated relevant lease”) and those with third parties. An “associated relevant lease” still requires the lessor to consider the position of the lessee from a tax perspective but 3^rd party leases are carved out of that requirement. This is a welcome change. The Bill also extends availability of this treatment where the asset is acquired from a related party in a non-arm’s length transaction.

There is also a change to another criterion which must be satisfied to qualify for financing treatment. Under last year’s Finance Act there was a requirement that the asset belonged to the lessor immediately before the lease was entered into. This was commercially challenging in the context of certain lease transactions (for example sale and lease backs of new aircraft) where the lessor would generally not take ownership in advance of the lease being entered into. The amendments in the Bill should alleviate this concern, as the condition is modified such that the asset must only belong to the lessor in advance of the asset being made available to the lessee (rather than in advance of the lease being entered into). Again, this is welcome particularly in the context of sale and lease transactions where (from a commercial perspective) the lessor would never intend owning the asset in advance of the lease being agreed.

There are also changes to Interest Limitation Rules which will be relevant for leasing (see ILR section below). Finally, the Pillar 2 updates outlined below in relation to DTAs on losses will be relevant for leasing groups which are in scope of Pillar 2.

5. Outbound Payments Legislation

The Bill includes two technical changes to the outbound payment rules on withholding taxes introduced in last year’s Finance Act:

• The first involves removing the reference to “a different territory” from the “look-through” provisions. Prior to this change, on strict interpretation of the rules the taxpayer could only “look through” a partnership (for example) to a partner for outbound payments purposes where the relevant partner was in a different jurisdiction to the partnership. The clarification in the Bill is welcome and ensures alignment of the rules with the general treatment of transparent entities from a tax perspective.
• The second relates to an amendment to the definition of “supplemental tax”. This is merely correcting some duplication in definitions in the rules introduced last year and should not impact from a practical perspective.

7. Value Added Tax (‘VAT’)

Non-compliance with CESOP information reporting requirements

The Bill introduces fixed charge penalties for non-compliance with the Central Electronic System Of Payment (‘CESOP’) information reporting requirements, introduced by last year’s Finance Act. Payment Service Providers (PSP’s), who are involved in making/receiving cross-border payments, must report to Revenue on a calendar quarterly frequency, details of payments and payees they facilitated (subject to various criteria).  The Bill introduces a penalty of €4,000 for each calendar quarter of non-compliance with the CESOP record keeping or reporting requirements. Additionally, a fixed charge penalty of €4,000 applies for failure to retain the relevant payment records for a period of 3 years from the end of the year in which the payments occurred.

VAT exemption for management services provided to AIF’s.

The Bill also includes a welcome amendment to the VAT exemption for management services provided to Alternative Investment Funds (AIF’s). It removes an anomaly in the legislation that management services provided by Irish AIFM’s to some Irish AIF’s, such as 1907 Limited Partnerships, could potentially have been subject to Irish VAT (while the same management services provided by an AIFM authorised in another Member State would have been VAT exempt).

The amendment confirms that exemption applies to AIFs managed by an a AIFM that is authorised or registered in any EU Member State.

9. Treatment of Interest – Consultation

There have been significant changes to Irish tax legislation in recent years particularly with respect to interest and tax deductions for interest; which has made the area much more complicated.

While there are no changes proposed in the Bill on this; the Department of Finance have signposted that they will look at simplifying domestic rules in relation to interest in due course. A Feedback statement was issued in September 2024 requesting feedback from stakeholders on the tax treatment of interest in Ireland. The timing of any potential simplification of rules is not yet clear but we will know more in due course. The consultation is a welcome development and EY will be actively participating in this consultation on behalf of our clients. The treatment of interest is particularly important for our FS clients across all sectors from banking, aviation and structured finance arrangements.

Appendix – Participation Exemption

Qualification Criteria

There are a number of conditions which must be met to claim the exemption:

• The distribution must be payable from a company resident for tax purposes in an EU or tax treaty partner jurisdiction since its incorporation or for a continuous period of 5 years prior to the distribution.
• The distribution must be paid out of profits or out of assets of the subsidiary.
• The recipient Irish company must qualify as a “parent” as defined under the rules. To qualify as a “parent” the company must be entitled to 5% of ordinary share capital, 5% of profits available for distribution and 5% of assets on a wind up in the subsidiary. This 5% holding requirement must be met for at least 1 year prior to the distribution being made.
• The distribution received by the parent company must be income for corporation tax purposes and must be chargeable to corporation tax under Schedule D Case III.
• The subsidiary must not be exempt from foreign tax (foreign tax refers to a tax in the foreign location which is equivalent of corporation tax in Ireland).
• If the distribution is made out of the assets of the subsidiary; then the conditions of s.626B (Substantial Shareholding Exemption) must also be met with respect to the shareholding in the relevant subsidiary to qualify for this exemption.

Exclusions

The following types of distributions do not qualify for exemption:

• A distribution which is subject to tax under Case III in the recipient but where the amount chargeable to tax is computed under the provisions of Case I (this is relevant for s.110 company parent entities – see below in “Impact for FS”)
• A distribution that has been deducted for tax purposes under the law of another territory;
• A distribution as part of a liquidation process;
• Any interest type return from an equity equivalent instrument;
• Any amount considered interest for the purpose of the interest limitation rules;
• Any dividend paid or other distribution made by an offshore fund that already qualifies for exemption under section 743.
• Distributions received by certain assurance companies taxable under Part 26 TCA 1997.
• Distributions received by an investment undertaking which is a company under s.739B.

In addition, there are anti-avoidance rules included in the Bill which disapply the exemption where the subsidiary making the distribution:

• Acquired a business from a company not resident in a treaty partner jurisdiction in a 5-year period prior to the distribution; or
• Was merged with a company not resident in a treaty partner jurisdiction in that time period.