Interest Limitation Rules - The impact on Banking and Insurance

Irish interest limitation rules 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 a Banking and Insurance perspective.

Key observations:

Financial undertakings

ATAD Article 4(7) provided that Member States could exempt certain “Financial Undertakings” from ILR. However, this was not implemented in the final ILR legislation, so no exemption was provided for financial undertakings. The non-application by Ireland of the financial undertaking exemption is considered more acceptable to many banking and insurance groups by comparison with a “mandatory” Financial Undertaking exemption as the mandatory exemption could in some scenarios have adverse implications for non-regulated entities as part of a wider financial group.
Reporting

Even if it appears reasonably certain that no interest restriction is likely to apply for the immediate future, it is likely that groups will be required to make a return to the Revenue Commissioners of specified data required to determine whether an interest restriction applies or otherwise. For this reason, the exact meaning of the rules will still be important to enable reporting obligations to be fulfilled.
Securitisation entities

To the extent that consolidated groups may include securitisation entities, it should be noted that these are not excluded from the interest limitation rules.
Interest equivalent definition

The definition of “interest equivalent” is an important concept for the banking sector as it will be important to understand the exact scope of certain items specified as being within scope of the term. For example, how direct does a connection have to be, in the phrase “amounts under derivative instruments or hedging arrangements directly connected with the raising of finance”? Other areas that may give rise to uncertainties around scope include FX movements on foreign currency debt and fair value movements on debt securities. In particular, there is provision in the rules for a portion of gains on a financial asset or liability to be included in the definition of “interest equivalent” where it would be “reasonable to consider that such amount is economically equivalent to interest”. Effectively, (and absent further guidance) the onus is on the taxpayer to make a determination as to the amount of such gain which should be considered “economically equivalent” for the purposes of ILR.
Application

While it might be expected that, in most cases, a banking or insurance group’s operations in Ireland might not generate any significant net interest expense, it would be important to assess whether the application of the detailed rules could give rise to unexpected outcomes. Overall, the practical impact of the rules will need to be considered in detail and forthcoming Revenue Guidance will be important in this respect.

Tax Alert — Update on Interest Limitation Rules

Impacts from a Banking and Insurance perspective

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

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Interest Limitation Rules – The impact on Banking and Insurance

Key observations:

Financial undertakings

Reporting

Securitisation entities

Interest equivalent definition

Application

Impacts from a Banking and Insurance perspective

Contact Us

Interest Limitation Rules – The impact on Banking and Insurance

Key observations:

Financial undertakings

Reporting

Securitisation entities

Interest equivalent definition

Application

Impacts from a Banking and Insurance perspective

Contact Us

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