The Department of Finance has published a second Feedback Statement on the introduction of a participation exemption in respect of tax on foreign dividends received by Irish holding companies. These changes will be included in Finance Bill 2024 to be published next month and are due to come into effect from January 1, 2025.
The Feedback Statement seeks final stakeholder input in respect of the proposed manner of implementing the exemption. Below are the key takeaways that our clients should be aware of.
1. Background and objectives
- Worldwide vs. territorial tax regimes: Ireland currently operates a worldwide corporate tax regime, which taxes both domestic and foreign profits of resident entities. The proposed participation exemption aims to simplify this by exempting most foreign dividends from taxation, aligning Ireland more closely with territorial tax regimes.
- Consultation process: The Department of Finance has been engaging with stakeholders through consultations and feedback statements. The first Feedback Statement was published in April 2024, and this second one in late August 2024, to gather more detailed input.
2. Geographic scope
- Current scope: Despite stakeholder pushback on limiting the geographical scope it seems that participation exemption will be limited to dividends from EU/EEA states and tax treaty partner jurisdictions. The existing tax credit rules will remain applicable to dividends received from other jurisdictions.
- While advisors submissions on the first Feedback Statement had suggested that the introduction of OECD Pillar 2 rules in Ireland should assist in being able to extend the geographic scope of the exemption the relevant Finance officials felt that the necessary additional safeguards that would need to be included would overly complicate the exemption.
3. Elections, default positions, and minimum terms
- Opt-in vs. opt-out: Initially proposed as an opt-in regime with a minimum three-year election period, stakeholders had suggested that the exemption should be the default unless opted out, without a minimum election period and also be available on a per subsidiary basis.
- Annual election: A revised approach now allows companies to claim the participation exemption on their annual corporation tax return for all qualifying dividends received in the relevant accounting period. But there will not be an ability to apply it on a per subsidiary basis.
4. Application to securitisation companies
- Section 110 companies: It seems that section 110 securitisation companies will not be able to avail of the exemption. This proposed exclusion is disappointing given the difficulties that have arisen for some such companies in obtaining credits for foreign tax.
4. Draft legislative approaches
- Commencement date: The participation exemption will apply to relevant distributions made on or after January 1, 2025.
- Definitions and conditions: Detailed definitions and conditions for qualifying as a parent company, relevant subsidiary, and relevant distribution are provided to ensure clarity and compliance.
5. Consequential considerations
It is noted that there are likely to be changes to other tax provisions in light of the introduction of the exemption including.
- Controlled foreign companies (CFC): Amendments to CFC rules will ensure that undistributed income is treated consistently with the new participation exemption.
- Dividends paid out of foreign profits: Modifications may be made to existing anti-avoidance rules to accommodate the new exemption.
- Unit trusts and collective investments: Potential amendments to ensure these entities are treated consistently under the new regime.
- Purchase and sale of securities: Ongoing considerations to ensure normal operations continue under the new exemption.
- Taxation of scrip dividends: Amendments may be required to ensure consistent treatment of shares issued in place of cash dividends.
- Transfer pricing: Potential amendments to include references to the new participation exemption.
- Preference shares: Consideration of restrictions on certain preference shares to prevent misuse of the exemption.
Next steps
The Department of Finance will consider responses to this Feedback Statement and may invite key stakeholders for further discussions. With only weeks now until the publication of the Finance Bill it would seem likely that the legislation is close to being finalised. Clients are encouraged to review these developments closely and consider how they may impact their current structures.
For more information on this, please contact any member of A&L Goodbody's Tax team.
Date published: 5 September 2024
