Taxation of Interest and the Financial Services sector in Ireland: A look to a less complex future?
Thursday 30th January was a significant day in Irish tax policy matters, as the Department of Finance brought to a close a long running public consultation on the tax treatment of interest Ireland. Asking 27 pertinent questions on the treatment of interest, the consultation addressed issue including taxation, deductibility and reporting to name but a few. Submissions to the Department of Finance in response are expected to contain significant technical and policy insights provided by practitioners and industry bodies alike. But this is not the end of the road for tax policy in this area – in fact, the work has only just begun.
One area given specific attention in the public consultation was the area of Financial Services and the treatment of interest in this space. While Ireland is well renowned as the home of the Black stuff, the ring of Kerry and rugby, we also have a world leading financial services sector which drives employment and continues to attract investment. According to the IDA and Enterprise Ireland, employment is at the highest it has ever been with estimates of 52,800 employed in the sector. The financial services and banking sector is given particular attention in the recently published Programme for Government which notes the importance of the sector and opportunities in new areas such as Fintech and green financing. While several initiatives and actions are listed to support the financial services sector, the Programme for Government does not address the key area which can be described as the lifeblood of this space: Interest or the price of borrowing.
Interest plays a critical role in the financial services space; a streamlined method for addressing the tax consequences associated with both interest income and expenses is therefore vital. In terms of interest income, currently such income derived from trading activities is taxed at 12.5% while non-trading (i.e. passive) interest income is taxed at 25%. As outlined in our response to the public consultation, we see no clear policy reason that a taxpayer carrying on a business subject to tax (but not meeting the required trading threshold) should be subject to a different treatment. Notably, many of our closest competitors in the financial services field (the UK and the Netherlands for instance) make no distinction between trading and non-trading activities when taxing profits. Our core recommendation to equalize the treatment between trading and non-trading financing activities would level the playing field.
In addition, tax rules on interest in Irish law can be described in one word: complex. Rapid changes at the EU and international level have driven legislative developments including interest limitation rules, anti-hybrid provisions and Pillar Two global minimum tax rules to name but a few. This is in addition to the existing rules in law which provide for detailed conditions and anti-avoidance, resulting in a system rife with uncertainty and complexity for taxpayers. And while technical complexity gets us tax enthusiasts out of bed in the morning, it can translate into stretched resources for companies looking to grow and expand their business with a negative hit ultimately felt to the bottom line.
A core theme in debt financing will always be the extent to which interest expenses are deductible in computing taxable profits. Tax relief for interest expenses includes interest incurred in the course of a trade, interest incurred under strict conditions treated as a charge on income and rental interest (in the case of a landlord receiving rental income). These rules require significant simplification and enhancement. Our core recommendation is the adoption of a broader relief to allow taxpayers who incur interest expenses in the course of their trade, profession or business to deduct such an expense. We would also recommend extensive reform of the interest as a charge rules – a task which is easier said than done, but nevertheless critical if we are to streamline deductibility rules. While previous Finance Acts have made some strides towards bridging the gap with the introduction of Qualifying Financing Companies (“QFCs”) into law, in our view these provisions do not go far enough.
Lastly, many transactions in the financial services space require a well-functioning, efficient system of withholding tax (WHT) to ensure that the flow of funds operates as intended. Currently, Irish law provides for interest WHT to be levied on payments in specific circumstances but with a range of exemptions available. While a range of WHT exemptions exist which are availed of the financial services space (for example the exemption for interest paid on quoted Eurobonds), the proliferation of legislation in this area can make navigating the rules complex for many companies.
The policy purpose behind a well-designed WHT system would appear clear: to ensure that tax is collected appropriately in instances where compliance by the recipient is expected to be minimal (or in some cases nonexistent), or in cases where the recipient is unlikely to tax the income received. In our view, repeal and reform of the existing regime would look keep it simple and to apply WHT in cases where there is a genuine risk of tax avoidance or reputational damage.
Can we expect changes in Budget 2026 as a result of this consultation? At this stage it may be too early to tell, but the policy landscape has certainly shifted towards a focus on enhancements and simplification. Quick fixes should be considered in the short term in key areas such as securitizations, streamlining the WHT regime and addressing the technical shortfalls in the QFC regime.
It will be critical in the coming months and years for stakeholders to continue to engage on changes in this area. All eyes will now be on the Tax Strategy Group papers to be released this summer and the Minister’s Budget 2026 speech towards the end of this year. In short, we have only just begun.
