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Tax update

Interest Limitation Rules – The impact on Structured Finance


Petrina SmythFS Partner, Business Tax Advisory
Ciarán ConroyFS Partner, Business Tax Advisory
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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 Structured Finance perspective.

 

Key observations:

  1. Securitisation entities

    The new interest limitation rules may significantly impact the tax position of Section 110 companies (S.110) which generally make returns to investors by way of interest on a Profit Participating Note (PPN). A S.110 whose shares are held by a charitable trust (Orphan S.110 structures) may not meet the definition of a standalone entity as they may be considered associated with the trust. However, it is possible the “single entity worldwide group” provision included in the rules will provide some measure of relief to such entities.

  2. Group ratios

    The group ratios provided in the rules will warrant careful consideration for SF groups given that group ratios are made available as optional for taxpayers. As different S.110’s will have different underlying “qualifying assets” and income mixes, one may be more favourable than the other.

  3. Capacity carry forward

    The carry forward of excess interest capacity is permitted for up to 5 years. Where a S.110 will have both interest and gains over the life of an investment, any excess interest capacity at the outset may be available to relieve excess interest expenditure upon realisation of any gains.

  4. Legacy debt

    Grandfathering will be important in relation to the definition of “legacy debt” in the rules. Loans concluded before 17 June 2016 are “grandfathered” outside the new ILR rules. However, amounts drawn down on/after 17 June 2016 will only be grandfathered in very limited circumstances, even where the loan was entered into prior to then and the terms of the loan provided for additional drawdowns. The only drawdowns that will be grandfathered are those that were scheduled based on milestones.


High angle view of Penang second bridge

Tax Alert — Update on Interest Limitation Rules

Impacts from a Structured Finance perspective

Structured Finance 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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