There were a number of measures introduced in the Finance Bill which will impact multinational companies within the Foreign Direct Investment community in Ireland including legislative provisions around Pillar Two, Amount B in a Pillar One context and Interest Limitation however perhaps the most prevalent is the new legislation on the Participation Exemption for Certain Foreign Dividends.
Under the new rules where an Irish tax resident company can demonstrate a foreign distribution received meets the definition of a ‘relevant distribution’ and it is received from a ‘relevant subsidiary’, Irish corporation tax should be exempt on the distribution received. The legislation provides an overview as to what is considered a ‘relevant distribution’ and a ‘relevant subsidiary’. The definition of a ‘relevant subsidiary’ includes a 5% ownership test and specifically excludes any subsidiaries exempt from tax.
The legislation also excludes subsidiaries that have changed tax residence or acquired a business in specific circumstances in the preceding period before the distribution is made. Companies will need to be aware of the specific circumstances which give rise to a subsidiary not meeting the definition of a ‘relevant subsidiary’.
Whilst the introduction of a foreign participation exemption on dividends into Ireland is certainly a welcome addition to Ireland’s tax regime and represents a key step by the Irish Government to tackle complex double tax relieving provisions, the geographic scope of the new exemption is only limited to EU/EEA and treaty countries.
From a practical perspective, this means if a country is outside the geographic territories listed above, existing complex double tax relief calculations will still be required to be completed to comply with Irish tax legislation.
We understand the government is committed to expanding the geographical scope of the new provisions however in the interim, Irish entities will need to manage a two-pronged approach to the charge to Irish tax on foreign dividends.
The Finance Bill specifically excludes countries in non-cooperative jurisdictions from the scope of the new measures. Additionally, the new legislation provided for in the Finance Bill relating to the foreign participation exemption also provides a number of exclusions from the new measures which we have outlined below.
What was unexpected?
The more detailed aspects of the new legislation on the foreign participation exemption on dividends provide a number of exclusions to the new proposed rules on foreign dividends receipts which we have summarised below:
Distributions which have been or may be deducted for tax purposes in a territory outside the State by virtue of the law of that territory.
Distributions made upon winding up of a subsidiary for which Section 626B Taxes Consolidation Act (“TCA”) 1997 does not apply.
Any interest or other income from debt claims providing rights to participate in a company’s profits.
Any amount considered to be interest equivalent (within the meaning of section 835AY TCA 1997).
Any dividend paid or other distribution made by an offshore fund as construed in accordance with section 743 TCA 1997.
Any distributions received from a country that is considered a non-cooperative jurisdiction.
Any distributions received from a subsidiary that was not resident in an EEA or DTA country in the 5 years preceding the year when the distribution was made.
Any distribution received from a subsidiary that acquired a business from a company not resident in an EEA or DTA country within the 5 years preceding the year when the distribution was made.
Any distribution received from a subsidiary which was party to a merger in the 5 years preceding when the distribution was made and the other party to the merger was not resident an EEA or DTA country.
Any distribution received from a subsidiary that has not been owned for an uninterrupted period of 12 months by the parent recipient of the distribution.
A distribution made to an assurance company where the relevant distribution is taxable in accordance with the provisions of Chapters 1 and 3 of Part 26.
A distribution made to an undertaking for collective investment (within the meaning of section 738 TCA 1997) which is a company.
Any distribution made the main purpose of which is to obtain a tax advantage and is not put in place for valid commercials reasons which reflect economic reality.
Any distribution made by a subsidiary where the parent has not elected into the new participation exemption via their annual tax return.
Who will be affected?
Irish resident companies with foreign subsidiaries that expect to receive distributions on or after 01 January 2025 will need to be mindful of the new rules to ensure they qualify for the exemption. In particular, companies will be required to assess if a specific distribution is considered a relevant distribution in accordance with the new participation exemption rules. To the extent that a company is satisfied that they wish to avail of the exemption for all relevant distributions an election will be required to be made on the annual tax return.
Our view
The introduction of the participation exemption for certain foreign dividends is a key step towards simplifying the Irish tax regime with regards to double tax relief on foreign dividends. Whilst the exemption available under the new legislation will address the compliance burden on Irish resident companies in receipt of foreign dividends, we welcome the Minister’s comments with regards to expanding the geographical scope of the rules. We would strongly welcome this expansion against the backdrop of the evolving OECD Pillar Two rules.
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