Ireland Inc. and Foreign Direct Investment

Key measures

As expected, Minister Jack Chambers confirmed that Finance Bill 2024 will provide for the introduction of a participation exemption for Irish companies. The participation exemption should be available for relevant distributions received on or after 1 January 2025 from subsidiaries in an EU / European Economic Area (EEA) and tax treaty partner source jurisdiction. From 1 January 2025 a company will have the option to claim the participation exemption or to continue to use existing tax and credit relief by way of an election in the annual corporation tax return. To the extent that a company makes an election to claim the participation exemption, it must do so for all dividends potentially in scope of the exemption in that period. 

Ireland is currently an outlier in an EU / OECD¹ perspective as it does not currently have some form of participation exemption for foreign source dividends and instead operates a complex “tax and credit” system which often results in no or negligible incremental tax arising in Ireland after operation of the current rules. The Minister also announced that next year will see consideration of a possible exemption for foreign branch profits while further consideration will also be given to the geographic scope of the participation exemption. 

Also, of note from an international tax perspective is that the Department of Finance have commenced work on a review of the taxation, and deductibility, of interest expenses by companies in Ireland. The taxation and deductibility of interest is a very complex area to navigate, which has been further complicated by the layering of significant and complex legislative provisions in recent years as part of Ireland’s commitment to the EU Anti-Tax Avoidance Directives and the OECD Base Erosion and Profit Shifting (“BEPS”) project. As mentioned by the Minister, a public consultation on interest was announced on Friday last, 27 September.

The introduction of the participation exemption on foreign sourced dividends and distributions and the review of the taxation, and deductibility, of interest expenses represent the first steps in the Government’s commitment to reducing the complexity of the Irish corporate tax system, which has become increasingly intricate in recent years. 

Following the significant changes in R&D credit regime last year, the government also announced an increase in the first-year payment of the R&D tax credit, from €50,000 to €75,000 and committed to a review of the current R&D credit regime over the coming year to enhance the competitiveness for innovative businesses in Ireland.

A new deduction for expenses of up to €1m relating to a first listing on an Irish/EEA stock exchange was announced by Minister Jack Chambers.

In addition, the Minister announced a new tax credit (subject to European Commission approval) for Unscripted Production at a rate of 20% on qualifying expenditure of up to €15 million, on satisfaction of a cultural test similar to existing provisions. There will also be a new 8% uplift under section 481 of the film tax credit, applying to feature film productions with a maximum qualifying expenditure of €20 million.

¹ Organisation for Economic Co-Operation and Development (OECD)

Who will be affected?

Of particular focus for the Foreign Direct Investment (“FDI”) community will be the introduction of a participation exemption on foreign sourced dividends and distributions and whether the forthcoming legislation and simplified mechanism for double tax relief calculations achieves the desired reduction in administrative burden and operational complexity.

Given the complexity of the taxation and deductibility of interest, it is likely that significant engagement with key stakeholders including the FDI sector will be required over the coming year to ensure that priorities are achieved.

The change to the R&D thresholds announced in Budget 2025 would provide cash flow support to companies engaging in smaller R&D projects. The FDI sector will be primarily interested in the review of the current R&D credit regime and any conclusions arising from same which the Minister referenced would be undertaken over the coming year.

The new deduction for first listing expenses and the new tax credit for unscripted production are specific measures to enhance the attractiveness of Ireland Inc. for companies in these particular areas.

When? What to do now?

Many companies and advisors have been actively engaged over the past year as part of the extensive public consultations and draft legislation released by the Department of Finance in respect of the participation exemption on foreign sourced dividends and distributions. However, with the confirmation in Budget 2025 of the introduction of this legislation, companies that have foreign subsidiaries should start considering these rules and whether this could reduce the complexity of double tax on outbound investments based on their own group structures. We await the additional detail once Finance Bill 2024 is published.

The public consultation on the deductibility, of interest expenses will run until the end of January. Key stakeholders have been asked to review a list of wide-ranging questions which has resulted in significant uncertainty and cost for taxpayers in respect to financing arrangements. As part of Deloitte Ireland LLP’s commitment to ongoing collaboration with the Department of Finance, we will be communicating key priorities in this area for our clients including the FDI sector and we welcome any discussions on this matter with impacted stakeholders.

Companies in the Film sector will be interested in monitoring the new tax credit for European Commission approval and reviewing details of the revisions to S481 film tax credit in the Finance Bill.

Our view

Ireland’s economic policy has been focused on attracting and retaining FDI and our reputation of certainty and stability has been key to the success of our FDI economy. The Minster in his budget speech acknowledged that international developments and commitments have seen significant complexity added to the corporation tax code in recent years and in a welcome move he noted that it is critical to actively work on maintaining Ireland’s attractiveness to businesses.

In this regard, the introduction of the participation exemption on foreign dividends is a first step in the Government’s commitment to reducing the complexity of the Irish tax system. However, more needs to be done to maintain the competitiveness of Ireland Inc. with international counterparts who have already an exemption in place for foreign dividends, sometimes complemented by an exemption for foreign branch profits. It will be interesting to see the final structure of this participation exemption in the Finance Bill and we eagerly await a progress update on the commitment to considering the expansion of this exemption to foreign branches in due course, such that Ireland would ultimately move to a full territorial regime for corporate tax.

While the commencement of the review of the taxation and deductibility of interest expenses is certainly welcome, the Minister cautioned in the public consultation document that this would require a significant body of work to be carried out over a multi-year timeframe. As explained in our pre-budget submission, the myriad of rules that apply to financing has resulted in significant uncertainty and cost for taxpayers. All of the interest provisions in our tax law are in general complex in their own right and it can be difficult to navigate the rules or provide certainty in respect of them – this places Ireland at a competitive disadvantage with other countries.

We look forward to continued engagement with the Department of Finance on this matter and on other specific areas of the Irish tax system which should be considered for simplification.