Response to the Second Feedback Statement on Participation Exemption in Irish Corporate Tax System for Foreign Dividends

Background 

In August, the Minister for Finance published a second feedback statement on the development of a participation exemption for foreign dividends. This follows the initial feedback statement and Strawman proposal released on 5 April 2024, and is in line with the Roadmap published in September 2023, which committed to the introduction of the participation exemption in Finance Bill 2024, to come into effect from 1 January 2025. 

The purpose of the second feedback statement was to progress towards development of a participation exemption for foreign dividends in the Irish corporation tax system. Building on the key themes identified in the first feedback statement and strawman proposal, the second feedback statement contains draft approaches to legislation and outlines a number of consequential amendments proposed on the introduction of a participation exemption.

As part of Deloitte’s commitment to continuous dialogue on matters of tax policy, we provided our views to the Department of Finance on the second feedback statement on the development of a participation exemption for foreign dividends.

Core recommendations and design features 

We agree in principle with the contents of the second feedback statement and with the proposed legislative approach outlined therein. The key features of the proposed legislation are summarised below: 

• The exemption operates to remove from the charge to tax a relevant distribution made by a “relevant subsidiary” to a parent company.
• The above treatment is contingent upon a 5% ownership test applicable to the parent, whereby the parent must hold (directly or indirectly) not less than 5% of the relevant subsidiary’s ordinary share capital (other than redeemable share capital), be entitled to no less than 5% of the profits available for distribution and would be beneficially entitled to not less than 5% of the assets of the subsidiary on a winding up. 
• In addition to the ownership test, the parent company must have held a participation in the subsidiary for an uninterrupted period of not less than 12 months. 
• Dividends within scope must be paid by a relevant subsidiary meaning a company which is subject to tax in and resident for tax in a relevant territory. A relevant territory in this context refers to an EEA other than Ireland or a Double Tax Agreement (DTA) country. 
• Where the participation exemption is availed of by the parent company, a relevant claim must be made in respect of all relevant distributions in the accounting period. Accordingly, the draft legislation operates on an “all or nothing” basis whereby all relevant distributions must be included within the relevant claim under the participation exemption. It is not therefore possible for a parent company to identify individual dividends or subsidiaries for the purpose of availing of the participation exemption.  
• The draft legislation contains a specific anti avoidance provision to disapply the exemption in cases where arrangements have been put in place to obtain a tax advantage or in cases where an arrangement is not “genuine”. 
• A relevant claim for the participation exemption is to be made on a year-by-year basis as part of the corporation tax return (Form CT1) to be filed by the parent company in respect of the accounting period in question. 

While the design of the draft legislation would appear in line with previous recommendations, we have outlined several areas of note in our response to the Department of Finance.

In summary, in our view

• The current limitation of the participation exemption to EU, EEA or DTA states is in our view too limited and appears out of step with other similar participation exemption regimes in other jurisdictions. In our view it is necessary that this be amended, or a stated commitment is necessary to further considering the broadening of the scope beyond the current proposals.
• The “out of profits” requirement is limiting and will put Ireland’s regime at a competitive disadvantage and should be removed.
• The rationale or benefit of the words “in respect of profits” is unclear. Such drafting could result in unintended consequences and should be reconsidered.
• The holding requirements applicable to a parent company should consider holdings in entities with no “ordinary share capital”. An “ownership interest” definition similar to that contained in Pillar Two legislation would greatly assist in widening the scope of exemption to holdings of entities without ordinary share capital.
• The holding requirements applicable to a parent company should consider group ownership and changes of ownership and reconstructions akin to the provisions contained in section 626B TCA 1997 and Schedule 25A TCA 1997. Also, the provisions for a company in liquidation should be considered.
• No specific anti avoidance provisions are required given the application of the General Anti Avoidance Rules and other provisions already in Irish legislation.
• The “all or nothing” basis for the participation exemption offers little flexibility to companies; a dividend-by-dividend basis/distribution-by-distribution basis for the exemption would be preferable, or at the very least a participation-by-participation basis.
• Consequential amendments to Controlled Foreign Company (“CFC”) rules envisaged by the second feedback statement should be reconsidered.
• It is important that the Irish participation exemption is introduced in a manner that achieves the government’s stated aim of simplifying the Irish corporate tax system while also ensuring that Ireland remains a competitive location for FDI.

Overall comments

We welcome the proposed introduction of a participation exemption into domestic legislation in Finance Bill 2024 so that foreign sourced dividends and distributions are fully exempt from tax in Ireland. This, we feel, is an important step towards an enhanced competitive tax system.

We acknowledge the caution for any proposal to observe international best practice and maintain a robust tax regime. The necessity for any Irish participation regime for distributions to be as simple as possible and provide certainty to taxpayers while enhancing our competitiveness underlies our views and comments.

We eagerly await a progress update on the commitment to consider introducing a foreign branch exemption into the Irish tax system.

Next steps

Responses to the second Feedback Statement will inform final decisions on the structure of the participation exemption for foreign dividends and distributions, planned for introduction in Finance Bill 2024. With Budget 2025 due to be announced on 1 October 2024, we understand that Finance Bill 2024 (“the Bill”) is expected to be published on 10 October 2024. In line with prior years, we expect the Bill to be signed into law before the end of 2024. We would therefore expect to see significant work in the intervening weeks and months to iron out the finer details of the participation exemption. Where the Bill is signed into law with the participation exemption included as we expect, the new rules will come into effect for distributions made on or after 1 January 2025.