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Financial Services Ireland

Tax update

Interest Limitation Rules – The impact on Wealth & Asset Management


Sinéad ColreavyFS Tax Partner, EMEIA WAM Tax Leader
Petrina SmythFS Partner, Business Tax Advisory
Ciarán ConroyFS Partner, Business Tax Advisory
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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 a Wealth and Asset Management perspective.

 

Key observations:

  1. Impact on WAM Structures

    The new interest limitation rules may significantly impact the tax position of asset managers, asset holding companies and downstream investment structures. The interest limitation rules limit both intragroup interest and third-party interest. Application of the new interest limitation rules has the potential to materially increase the effective cost of investment funding through higher effective tax rates by limiting the deductibility of net borrowing costs in a given year to a maximum of 30% of EBITDA. This could particularly impact regulated fund (i.e. QIAIF) and S.110 structures.

  2. Financial Undertaking Exemption

    There is no exemption for “Financial Undertakings” in the interest limitation rules. In EY’s responses to the Feedback Statements issued by the Department of Finance, we requested that in order to allow for greater taxpayer optionality it would be preferable to provide for an optional exclusion for Financial Undertakings whereby taxpayers could chose to apply the exclusion or not depending on their own specific facts and circumstances. However, this was not accepted in the final ILR legislation and no exemption was provided for Financial Undertakings.

  3. Group Ratios

    The group ratios provided in ATAD will warrant careful consideration for asset management groups particularly given that group ratios are made available as optional for taxpayers. As different investment funds will have different underlying capital structures, one may be more favourable than the other. If the group has a high debt to equity ratio of external debt, this could mitigate the impact of the rules.

  4. Legacy Debt

    It is common practice in asset management groups that the asset holding company will enter into a facility arrangement with third-party investors to fund the investments. Grandfathering will be important in this context 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.


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Tax Alert — Update on Interest Limitation Rules

Impacts from a Wealth and Asset Management perspective

Wealth and asset management organisations 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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