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The Irish Finance Bill implementing the measures announced in the Budget early this month and some unannounced changes was published late last week.
The Bill will need to proceed through the Irish Parliament, where further changes may be made. There is speculation that this process may be accelerated this year to ensure that the Bill is passed before the (as yet unannounced) general election, which political observers are saying could occur in late November.
There are three changes included in the Bill which should be of particular interest to those in the Financial Services and Asset Management Sectors.
Participation Exemption for Foreign Distributions
The long-awaited dividend participation exemption for foreign dividends will come into effect from 1 January 2025. This change will be very welcome for those entities that are in receipt of foreign dividends and currently must navigate the existing, highly complex, tax credit system and should further facilitate using Irish holding companies in investment structures.
The Department of Finance issued two feedback statements on initial drafts of the legislation earlier this year (as well as a number of consultations over many years on related issues such as the introduction of territorial tax system), which gave good opportunity to address concerns that were raised in the original draft rules.
As expected following the feedback statements, the exemption will work as follows:
A 100% exemption from tax will be available in respect of qualifying dividends
The exemption will apply to dividends received from a 5% (direct or indirect) subsidiary in an EU/EEA state or jurisdictions with which Ireland has a double tax treaty
The exemption will not require that the distribution is paid from “trading” profits, but it must be treated as income in the hands of the recipient
The exemption will be optional; companies can elect to remain within the current tax credit system if preferred
Certain corresponding changes will also be made to other tax legislation, including CFC rules, the treatment of unit trusts and collective investments, and transfer pricing rules
A 5% (direct or indirect) subsidiary requires the recipient to hold an entitlement (directly or indirectly) to at least 5% of the voting rights of the subsidiary, 5% of any profits available for distribution, and 5% of any assets on a winding up.
The limited geographic scope of the exemption was raised by multiple respondents to the feedback statements. While this limitation has been included in the legislation, the Minister committed in his Budget day speech to giving this further consideration in line with the ongoing implementation of the OECD Pillar 2 measures.
This exemption must be claimed in the company’s corporation tax return. If not claimed, the current tax credit system will continue to apply. Section 110 securitisation companies cannot avail of this exemption.
Pillar 2 Developments
Some helpful changes to Ireland’s implementation of the OECD Pillar 2 rules as they affect investment structures are contained in the Bill.
Last year legislation was introduced to implement a 15% minimum tax rate under the OECD Pillar Two agreement, as adopted in the EU’s Minimum Tax Directive (the Pillar 2 rules), in respect of accounting periods beginning on or after 31 December 2023. A year on and Finance Bill 2024 legislates for a number of updates to those rules – principally on foot of the Pillar 2 GloBE Administrative Guidance released in December 2023 and June 2024. Of particular note are the helpful updates in relation to section 110 securitisation companies and investment funds.
Securitisations
In the context of securitisations using Irish s110 companies there were some difficulties being encountered where there was a potential risk that Irish QDTT top up tax where the securitisation company was consolidated for accounting purposes with other Irish companies could be allocated to the securitisation company. While in most situations this was conceptual in nature it was in some situations requiring structural solutions and cut across the essential orphan nature of such structures.
Ireland is now providing that a QDTT charge will not arise to a securitisation company where there are other entities in the Irish group that are not themselves securitisation companies.
As such to the extent a securitisation company may have a QDTT liability, whereby additional tax is owed under the Pillar 2 rules by reason of the company having an effective tax rate below 15%, such QDTT charge will not be visited upon the securitisation company; a welcome development.
Any QDTT liability of the securitisation company will be imposed instead on another constituent entity of the MNE group of which it is a member assuming there is at least one other non-securitisation company in the Irish group.
In the event there is no such other company in the Irish group any QDTT due will be suffered by the securitisation company itself.
Investment funds
In the original implementation of the QDTT Ireland had gone further than strictly required by the Directive in imposing QDTT on stand-alone entities with revenues in excess of €750m This potentially put Ireland at a disadvantage to other jurisdictions that had not done so. This was of particular concern in the context of investment funds.
A carve out is now being introduced from Ireland’s QDTT where a standalone fund entity (i.e. broadly an entity that is not consolidated for accounting purposes with another entity) has revenues above €750m.
This exclusion will remove investment undertakings (e.g. unit trusts, ICAVs, CCFs and ILPs) from the potential scope of the QDTT where they are not otherwise a member of a consolidated group for accounting purposes.
This is another welcome development which should give greater certainty to investment funds and dispense with the need to monitor their revenues for potential breaches of the €750m threshold on an ongoing basis.
VAT – Fund Management Exemption
Finance Bill 2024 includes welcome provisions that clarify the scope of the fund management exemption as it applies to alternative investment funds (AIFs). This change is of particular relevance to unregulated funds such as the Irish 1907 limited partnership (1907 LP).
The 1907 LP is not listed in Irish VAT legislation as an entity that falls within the scope of the fund management exemption. Certain changes were made in Finance Act 2022 which expanded the scope of the fund management exemption to include EU AIFs where the AIF is managed by an alternative investment fund manager (AIFM) authorised by the competent authority of another EU Member State. Therefore, since 1 January 2023, EU AIFs (which could include a 1907 LP) qualified for the fund management exemption only if they were managed by an AIFM regulated in an EU jurisdiction other than Ireland.
This inconsistency in treatment has been the subject of ongoing engagement between various industry bodies and the Irish Department of Finance. This amendment now makes it clear that EU AIFs (including 1907 LPs) that are managed by an EU regulated AIFM, including an Irish AIFM, qualify for the fund management exemption. This is a welcome change that removes any uncertainty surrounding the ability of Irish AIFs, including 1907 LPs, that are managed by an Irish AIFM to qualify for the fund management exemption.
If you would like more information, please contact any member of the A&L Goodbody's Tax team.
Date published: 14 October 2024
