21 Nov 23
Finance Bill 2023 - Changes to Ireland's tax regime
The Finance (No. 2) Bill 2023 was published on 19 October following the Budget Day speech delivered by Minister for Finance Michael McGrath. The bill, which includes over 98 sections, is one of the largest finance bills in recent history and includes provisions to implement the tax policy changes announced by the Minister, as well as a number of technical changes to the Irish tax code which were not previously announced. These new measures include a new interest deduction mechanism for on-lent funds, as well as changes to taxation of share options, stamp duty and pensions.
Some measures announced in the budget, including the Capital Gains Tax Relief for Angel Investors and amendments to the exemption of income tax on the leasing of farmland, have not been included in the published bill but rather have been deferred for introduction at Committee Stage.
As the bill moves through the Committee Stage within Dáil Éireann, it will likely undergo a number of amendments, and is forecast to be signed into law next month.
The sections below outline the key provisions of the bill as they apply to companies operating in Ireland.
The scale of this year’s Finance Bill is driven primarily by the transposition of the EU Minimum Tax Directive and the OECD model rules and guidelines in line with Pillar Two. Pillar Two seeks to ensure that large groups are subject to a minimum effective tax rate of 15%. Large groups are defined as multinationals and domestic businesses with a global annual turnover of €750 million in at least two of the proceeding four years. The introduction of Pillar Two marks a major shift in Irish corporate tax policy. That said, the majority of Irish businesses will not fall within the scope of this legislation and will remain subject to the existing 12.5% corporate tax regime.
The Pillar 2 legislation also includes a range of provisions by which the Irish Revenue Commissioners (“Revenue”) can ensure that qualifying companies are subject to the 15% effective tax rate including:
Income Inclusion Rule: The primary Pillar Two rule requires the ultimate parent entity in the group to ensure that its subsidiaries have paid the effective tax rate for each relevant jurisdiction. Where a group has not satisfied this requirement, the ultimate parent will be subject to an additional tax liability in its jurisdiction to the level that the overall group has an effective tax rate of at least 15%.
Undertaxed Profit Rule: Where an ultimate parent is not a tax resident in a Pillar Two jurisdiction, the undertaxed profit rule requires for an increase in the tax liability to be applied at the subsidiary level. This rule is not expected to come into effect until 2025.
Qualified Domestic Top-Up Tax: Ensures that in-scope entities which are Irish tax resident will pay a top-up on the tax due to the Irish exchequer rather than this tax liability occurring at a group level in another jurisdiction.
The Pillar 2 regime will come into force for in-scope entities with accounting periods beginning on or after 31 December 2023, although the legislation includes several transitional and permanent safe harbour provisions to help ease the transition.
The legislation includes amendments aimed at preventing double non-taxation of outbound payments of interest, royalties and distributions to associated entities resident in jurisdictions on the EU list of non-cooperative jurisdictions and non-tax/zero tax jurisdictions. This change will impact certain domestic withholding tax exemptions, wherein withholding tax will be applied on applicable outbound payments by Irish companies to associated entities that are resident in relevant jurisdictions. The proposed legislation is intended to apply for payments made on or after 1 April 2024, but there are several grandfathering provisions which extend the deadline for certain arrangements to 1 January 2025 .
There have been several amendments made to the tax rules applicable to leasing arrangements including changes to the tax calculation approach for both lessors and lessees, changes to the balancing allowance/charge provisions and changes to certain ring-fence provisions.
In calculating the profits for tax purposes, the lease income in the case of the lessor and the lease expense in the case of the lessee are generally spread evenly over the life of the lease, regardless of how the transaction is recognised for accounting purposes. However, if the burden of wear and tear falls on the lessee, the lessor is taxed with the accounting treatment of a finance lease.
Section 403 provides for a restriction on the use of capital allowances in respect of certain leased assets. The section is amended to reflect the lease adjacent activities carried out by leasing groups. The definition of a trade of leasing is also being modified to remove an artificial demarcation in a company between the receipt of lease rental income and income from its lease adjacent trading activities. The section is also amended to ensure that certain loss relief and capital allowance provisions operate in tandem.
Qualifying Finance Companies
The legislation introduces the concept of a ‘qualifying financing company’ and provides that such a company meeting certain conditions will be entitled to a tax deduction for interest paid in respect of financing where the funds are on-lent to qualifying subsidiaries.
A qualifying finance company is a company that obtains third-party finance and advances this to direct 75% subsidiaries, which in turn use the funds wholly and exclusively for their trades. The relief consists of a Schedule D Case III or Case IV deduction (i.e., non-trading) for external interest on the element of third-party loans.
The R&D tax credit has been increased from 25% to 30% with the first payment threshold also increased from €25,000 to €50,000. A pre-notification requirement has also been introduced for this tax credit which will apply to companies claiming the credit for the first time or those who have not claimed the credit for three years.
With regards to Film Relief, the cap on relief for qualifying expenditure for the purposes of the corporation tax credit has increased to €125 million.
The Employment Investment Incentive regime has been updated to bring it in line with EU State Aid rules. The minimum holding period to obtain the relief will be standardised to four years for all investments from 1 January 2024, with the limit which investors can claim relief on increased to €500,000.
Dividend Withholding Tax
The Bill includes amendments to the dividend withholding tax (DWT) legislation to ensure that DWT and associated income tax provisions are in compliance with EU law. Withholding exemptions have been extended to distributions to EEA residents and equivalent pension schemes in countries where Ireland has a Tax Information Exchange Agreement.
DAC6 / DAC7
The bill includes a clarification which allows Revenue to issue letters of enquiry in relation to DAC6 returns to ensure that the return was correct and complete, rather than needing to conduct an on-site inspection.
Furthermore, the bill transposes DAC 7 into the Irish statue books, which provides a legal basis for the Irish Revenue Commissioners and other EU tax authorities to conduct joint audits. Joint audits mark a significant shift in the market and demonstrate the ever-growing trend of cooperation between states on tax policy. Further information on DAC 7 reporting requirements is available here.
Why Cafico International
Navigating tax compliance in unfamiliar jurisdictions presents a significant challenge for companies, particularly where legislation continues to evolve. Cafico International offers a wide range of services to support clients in complying with all applicable tax regulations and reporting.