Background

On 4th August 2022, the Irish Revenue Commissioners issued guidance on the newly introduced Interest Limitation Rules (“ILR”) which were brought into law in Finance Act 2021. Introduced on foot of Council Directive (EU) 2016/1164 of 12 July 2016 (“the Anti-Tax Avoidance Directive” or “ATAD 1”), the ILR imposes a restriction on the interest deductibility of corporate entities up to 30% of a taxpayer company or group’s taxable earnings before interest, tax, depreciation, and amortisation (“EBITDA”).

In legislating for ILR, the Department of Finance engaged with stakeholders through Feedback Statements issued in December 2020 and July 2021. The legislation ultimately introduced is contained in Part 35D of the Taxes Consolidation Act 1997 (“TCA97”) and comprises 5 chapters spanning the scope of the rules, the calculation of the restriction (where applicable) and the carry forward of disallowed amounts or total spare capacity.

The guidance issued by Irish Revenue addresses various aspects of the law as enacted including but not limited to key definitions, the meaning of interest equivalent and the calculation of allowable and disallowable amounts for both single taxpayers and for interest groups.

To access the guidance issued, click here.

Key areas addressed in guidance

At over 60 pages, the guidance on the ILR provides further detail on the key elements of the law. A number of key features are addressed in guidance, including:

• Further detail on the meaning of “Interest equivalent” for the purposes of the ILR. In particular, a range of worked examples are provided addressing scenarios such as the treatment of guarantee fees connected with the raising of finance, hedging derivatives and interest equivalents on non-performing loans.

• The “finance element of finance lease payments” is to be treated as interest equivalent for the purposes of the ILR as is the finance income and cost elements of non-finance lease payments of a company carrying on the trade of leasing. The guidance provides for further worked examples in this regard.

• The calculation of EBITDA and operation of the restriction including the use of any carried forward disallowable amounts and total spare capacity.

• The application of the Group and Equity Ratios in the context of worldwide accounting groups: With respect to the Equity Ratio rule, such a rule requires a comparison of the equity to assets ratio of the relevant entity to the worldwide group (or Single company worldwide group as appropriate). This requires that accounting standards and policies must be equivalent and therefore may necessitate adjustments to the results of the relevant entity. The guidance recognises that where an Irish subsidiary prepares financial results under a set of accounting standards different to the ultimate consolidated accounts, a Reporting pack may be prepared for the entity under the GAAP of the ultimate parent. The guidance indicates that Revenue is prepared to accept such a Reporting pack as a basis for assessing whether the conditions of the equity ratio rule are accepted; such a simplification will likely be welcome to taxpayers assessing the potential impact of the ILR in the context of large and complex group structures. However, whether or not a Reporting Pack is produced, a reconciliation from local statutory accounts to accounts used for the purposes of the equity ratio test must be maintained.

• In dealing with the calculation and operation of the restriction in the context of interest groups the legislation provides that amounts calculated in respect of an interest group will comprise the results of all members of the interest group. It is silent as to the exact method for such a calculation. The guidance issued by Irish Revenue confirms that such a calculation may be carried out on either an aggregation or a consolidation basis (whereby results may be adjusted to remove intercompany transactions between interest group members). The guidance confirms that the methodology chosen should be applied on a “consistent basis”.

• The guidance provides further detail on the reporting requirements which arise in the context of the ILR, with details to be provided on the relevant entity’s corporation tax return (Form CT1).

• Lastly, the guidance provides further commentary on the treatment of preliminary tax payments in an ILR context. In recognition of the difficulties that some companies may face in accurately forecasting their expected corporation tax liability in advance of their year end, the legislation enacted allows for a top up payment to be made 6 months after the end of the accounting period where there is an underpayment of preliminary tax caused by the ILR. This temporary measure will cease to be in effect for accounting periods ending after 31 December 2027. However, the guidance issued confirms that the ability to make top up payments in respect of gains on disposals of assets or in respect of certain profits or gains on financial assets or liabilities remains unchanged.
  

Next steps and action items for taxpayers

The ILR is applicable to accounting periods commencing on or after 1 January 2022. Accordingly, while amounts relating to the ILR are unlikely to feature on corporation tax returns to be filed in the coming months, we would nevertheless expect a body of work to be required in modelling and preparing for the impact of the ILR. In particular, companies should act now (if they haven’t already done so) to put in place sufficient resources and infrastructure to accurately assess the impact of the ILR as part of next year’s compliance cycle. Advance modelling may need to be carried out for larger and more complex group structures to identify the projected impact of the rules on cash tax liabilities, the availability of Group rules and in particular the identification of which companies should elect into an interest group, if such an election is to be made.

Should you have any query on the potential impact of the proposed changes to you or your business, please do not hesitate to reach out to your Deloitte contact for further information.