New Taxation Measures to apply to outbound payments

The Irish Department of Finance recently published proposed legislation to apply to certain outbound payments as part of the Feedback Statement “New Taxation Measures to apply to Outbound Payments”. The new measures aim to prevent double non-taxation applying to outbound payments to jurisdictions on the EU list of non-cooperative jurisdictions, no-tax and zero-tax jurisdictions with effect from 1 January 2024.

Background

As part of Ireland’s National Recovery and Resilience Plan (“NRRP”) the government made a series of commitments to tackle aggressive tax planning. Many of these steps have been implemented in recent years with the final remaining commitment to introduce legislation applying to outbound payments. The implementation of these proposal represents a critical part of the legal commitment made by Ireland to secure funding under the Recovery and Resilience Facility (“RRF”).

The Feedback Statement “New Taxation Measures to apply to Outbound Payments” was published on 7 July 2023 and follows a public consultation in November 2021 on outbound payments (to which Deloitte made a submission). It is noted in the Feedback Statement that the proposed legislation and objectives reflect the department’s views and proposed responses to the submissions received to the public consultation.

Proposed legislative changes

In summary, it is anticipated that the measures would apply to outbound payments of interest, royalties and dividends to a “specified territory”. The proposed definition of a specified territory “means a territory, other than a relevant Member State, which is a listed territory or a zero-tax territory”. Broadly a zero-tax territory is one which applies a nominal rate of zero percent or does not impose a tax that generally applies to such income. It is noted in the Feedback Statement that the measures are not intended to apply to zero-tax jurisdictions “that provide a participation exemption where the relevant conditions for that exemption are met in that jurisdiction”.

Withholding tax should apply in a scenario where the payment of interest, royalties or dividends, to an associated entity or a permanent establishment of an associated entity, are not subject to a “supplemental tax” i.e. a foreign company charge, or a top up tax under the OECD Pillar 2 Global Anti-Base Erosion Rules.

The proposed measures are intended to apply only to connected, related, affiliated entities – “associated entities” i.e., transactions between entities that are associated through one entity having control of the other or both are under the control of another entity or where one entity has “definite influence” in the management of another entity.

There are also a number of anti-avoidance measures contained within the proposed legislation.

Proposed timing

According to the Feedback Statement the intention is to introduce legislation to this effect in Finance (No. 2) Bill 2023 and the new provisions will apply to payments on or after 1 January 2024.

Potential impact of proposed legislation:

1. Potential impact on payment of interest

Based on the draft legislation where the rules apply to the payment of interest to an associated entity in a specified territory, the withholding tax exemptions available under Irish tax legislation on interest payments on quoted Eurobonds, interest to certain non-resident companies and wholesale debt instruments will not apply. It is important to note that withholding tax should also extend to short interest that is not yearly interest where the new rules apply.

2. Payment of royalties

In the case of the payment of royalties to an associated entity in a specified territory, the draft legislation provides that withholding tax may apply. Currently the only royalties potentially subject to Irish withholding tax are patent royalties or annual payments (i.e. where the royalties are considered “pure income profit” in the hands of the recipient). The proposed legislation extends withholding tax to a broader definition of royalties where they are paid to an associated company resident in a specified territory and not subject to “supplemental tax”.

3. Payment of dividends

The proposed legislation provides that the withholding tax exemptions on dividends to certain non-residents, relevant intermediaries and certain other exemptions under Irish tax legislation may not apply where the payment of dividends is to an associated entity in a specified territory.

Next steps

The closing date for responses to the Feedback Statement is 8 August 2023 with the proposed legislation due to apply on or after 1 January 2024. Deloitte Ireland LLP are in the process of drafting a response to same.

While the Feedback Statement is subject to change as it works through the legislative process, it is important that entities consider their overall group structures with respect to outbound payments to determine any potential impact. Please reach out to any of the contacts below or your regular client contact to discuss these proposals in further detail.