Financial Services Ireland

Irish interest limitation rules (“ILR”) are effective for accounting periods beginning on/after 1 January 2022. They were introduced in the Finance Act 2021 as part of Ireland’s implementation of the EU Anti-Tax Avoidance Directive. Below we have summarised some key observations on the Interest Limitation Rules from an Aviation perspective.


Key observations:

  1. ILR Impact – Aviation

    Aviation finance is a capital-intensive industry and a financing business where profits derived on lease rentals to a large extent depend on a mark-up on the cost of funding. Lessors are typically very highly leveraged and therefore the new interest limitation rules have the potential to restrict interest deductions (even relative to other industries) due to the fact that: i. lessors are in a lending business and deploy significant amounts of capital each year and ii. the lease rental returns on operating leases are not generally classified as interest income (subject to comments below). The rules provide that a portion of lease rental income on an operating lease can be considered “interest equivalent” for the purposes of ILR and a formula is provided to calculate this portion in the rules.

  2. Securitisation entities

    S.110 entities are not excluded from the interest limitation rules. S.110 companies are often used to own / hold aircraft as “qualifying assets”. The interest limitation rules could more significantly impact on s.110 companies as they are wholly debt funded causing some limitation on the profit participating interest.

  3. De Minimis threshold

    The availability of the €3million de minimis threshold on an entity-by-entity basis offers a measure of relief to aircraft lessors and will help minimize the inequitable impact of the new rules on aviation. It may be advantageous from this perspective to have single aircraft owning SPVs (as opposed to multiple assets in one company).

  4. Group ratios

    The group ratios provided (Equity rule and Group Ratio rule) will warrant careful consideration for aviation groups particularly given that both ratios are made available as optional for taxpayers. As different lessors will have different underlying capital structures, one may be preferable to the other. If the group has a high debt to equity ratio of external debt, this could mitigate the impact of the rules. The group ratio rules could also provide a measure of relief for orphan structures and other collective investment structures held through limited partnerships with nominal equity funding.

  5. Practical issues

    EBITDA as a measure might not be very reliable for an aircraft leasing company. By way of example, components of revenue such as end of lease compensation payments and maintenance events could drive complexity in examining the impact of the new rules on transactions and introduce uncertainty into cashflow modelling exercises. The practical impact of the rules will need to be considered together with new transfer pricing measures on debt capacity, the interaction with the leasing ringfence on capital allowances under s.403 TCA 1997 and the use of losses and loss planning where there are multiple aircraft owning SPVs as is common in the aviation leasing sector.


Impacts from an Aviation Finance perspective

Aviation businesses need to consider how Interest Limitation Rules will impact their operations. Read our insights into what they mean for the industry.

Read now

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