Financial Services Ireland

The impact of Interest Limitation Rules on banking and insurance – June 2021 Update

Read more

Some observations on the effect of the new rules on the banking and insurance sector

  • ATAD states the following:

“Although it is generally accepted that financial undertakings, i.e. financial institutions and insurance undertakings, should also be subject to limitations to the deductibility of interest, it is equally acknowledged that these two sectors present special features which call for a more customised approach. As the discussions in this field were not sufficiently conclusive in the international and the Union context, it is not possible to provide specific rules in the financial and insurance sectors and Member States should therefore be able to exclude them from the scope of interest limitation rules”.

  • Therefore, ATAD Article 4(7) provides that Member States may exempt certain financial institutions.
  • In our responses to the Feedback Statements issued by the Department of Finance, EY has requested that in order to allow for greater taxpayer optionality it would be preferable to provide for an optional exclusion whereby taxpayers could choose to apply the exclusion or not depending on their own specific facts and circumstances. However, at present, this is not expected to be accepted.
  • Assuming the exemption would not extend to non-regulated group entities, banking and insurance groups could be adversely impacted from an automatic exclusion of the regulated entity from the group tests for interest limitation.  For this reason, non-application by Ireland of the exemption may prove to be more acceptable to many banking and insurance groups.
  • To the extent that groups may have securitisation entities, it should be noted that these are not excluded from the interest limitation rules.
  • The definition of “interest equivalent” will be an important concept for the banking sector as it will be important to understand if items such as income from certain derivatives, gains on distressed debt, FX movements, fair value adjustments and sale and repurchase agreements would fall within the definition.
  • The practical impact of the rules will need to be considered holistically in the context of other changes in Irish tax law in relation to Transfer Pricing (Debt Capacity rules).

Ray O’Connor

FS Partner, Tax
Ray's Full Profile