More specifically, the bill includes provisions to implement the interest limitation rules and the anti-return hybrid rules arising from the EU Anti-Tax Avoidance Directive (“ATAD“).
The bill also usefully amends the transfer pricing exemption for Irish-Irish transactions, introduces new rules for the allocation of branch profits based on the authorized OECD approach and a new digital play credit. The bill also includes a number of technical amendments to the current Irish anti-hybrid rules and transposes DAC7 (imposing reporting obligations for certain digital platforms) into Irish law.
We’ve summarized some of the main changes below:
Interest limitation rules
In accordance with ATAD obligations, the bill implements new interest limitation rules (“ILR“).
The new ILR limits the maximum tax deduction of net borrowing costs to 30% of EBITDA for companies falling within the scope of the legislation. ILR does not apply to net borrowing costs less than € 3 million de minimis threshold set in ATAD. There are also exemptions for independent companies, patrimonial debts (the terms of which were agreed before June 17, 2016) and for certain long-term infrastructure projects. The ILR also includes an option for companies to apply the rule on a single entity or on a local group basis and for certain group reliefs to apply when the Irish taxpayer is part of a consolidated global group. for accounting purposes (by applying a capital ratio rule or a group ratio rule). In addition, any refused interest can be carried forward to a taxation year in which the interest capacity is available. Excess interest capacity during an accounting period can be carried forward for up to five years.
The ILR will apply to accounting periods beginning on or after January 1, 2022.
Implementation of ATAD hybrid anti-return rules
In addition to the technical changes to Part 35C of the ATT, the bill also implements new hybrid anti-return rules, in line with Ireland’s obligations under section 9a of the ATAD. The approach taken in the bill reflects industry feedback to the Department of Finance consultation on the implementation of the rules.
The new rules will tax income in Ireland that would otherwise be untaxed because the relevant Irish entity (e.g. an Irish partnership) is considered fiscally transparent in Ireland, but fiscally opaque in a participant’s territory. Against this background, the bill proposes that certain entities which would be considered fiscally transparent in Ireland should be subject to the scope of Irish tax where:
(i) the entity is owned or controlled at 50% or more by entities that reside in a jurisdiction which considers it to be fiscally opaque; and
(ii) as a result, an incompatibility occurs.
Under the new Section 835AVD TCA, a reverse hybrid asymmetry result will occur when all or part of the profits or gains of a reverse hybrid entity are not subject to Irish or foreign tax. The asymmetry is neutralized by imposing an Irish corporation tax charge on the reverse hybrid entity in respect of such profits and gains. It is important to note that the bill provides that a reverse hybrid asymmetry result should not arise in respect of the profits or gains of a reverse hybrid entity that are attributable to a relevant participant who is:
(i) exempt from tax in the territory where it is established;
(ii) established in a non-taxable territory; Where
(iii) established in a territory which does not impose tax on income or profits derived from abroad.
The new rules also incorporate certain exclusions facilitated by ATAD. In particular, there is an exemption for “collective investment undertakings”, which includes Irish regulated investment funds. For a collective investment scheme to qualify for the exemption, it must (a) be broadly owned and (b) hold a diversified portfolio of assets.
The rules will apply from January 1, 2022.
Modification of anti-hybrid rules
The bill introduces a number of technical changes to Part 35C TCA (which implemented the ATAD anti-hybrid rules), including a change to the definition of an entity to ensure greater compliance with the ATAD. This definition now includes “any other legal construct of any kind or form whatsoever, which owns or manages assets, which is subject to one of the taxes” covered by the anti-hybrid provisions. In addition, Section 835AB TCA which deals with the application of anti-hybrid rules in the context of global tax systems (to ensure that the rules only work to neutralize actual economic hybrid mismatches and not technical hybrid mismatches) is extended. by the bill to cover patterns of facts, including certain payments involving individuals.
The bill proposes to clarify and expand the scope of the current exemption from the transfer pricing rules for certain Irish-Irish transactions.
As discussed in our March updated, the current exemption had given rise to certain difficulties of interpretation for both taxpayers and practitioners, particularly in the context of transactions for which no consideration was payable. Although some amendments to existing legislation were to be introduced by the 2020 finance law to resolve some of these interpretation issues, these amendments were never fully adopted and will now be replaced by the updated proposals in the bill. .
The bill now proposes to address the issues by more clearly delineating the scope of the exemption, including in the context of transactions for which no consideration is payable. The proposed changes are expected to result in a wider range of exempted transactions, provided the conditions of the legislation are met. These conditions include a requirement that the transaction must be concluded between Irish resident taxpayers other than in the course of a commercial activity carried on by them.
It is proposed that the changes take effect for fiscal years beginning on or after January 1, 2022 and, unlike last year’s finance law, are not subject to an opening ministerial decree.
The bill is expected to provide welcome certainty to taxpayers and practitioners about the application of the Irish-Irish exemption.
Attribution of profits to a branch – application of the OECD approach
The bill inserts a new Section 25A TCA to provide for the application of the authorized OECD approach to the attribution of income to branches of non-resident companies in Ireland. In accordance with OECD guidance, the relevant branch income that is attributable to a branch is the amount of income that it would have earned had it been an independent and separate enterprise. This amendment essentially codifies the obligation to comply with the OECD guidelines and also introduces prescribed documentation requirements with the aim of ensuring that the relevant branch income has been calculated in accordance with these guidelines. Penalties will apply to taxpayers who fail to provide the tax authorities with the relevant records of their branch. This new article will come into force for fiscal years beginning on or after January 1, 2022. SMEs will come within the scope of the new provision subject to ministerial decree.
Section 79 of the Bill inserts a new Section 891I TCA to transpose the DAC7 into Irish law. The DAC7 introduces new reporting obligations for certain digital platform operators. As discussed in our april update, the digital platform operators concerned are those who provide a platform for the sale of goods, the rental of real estate, the provision of personal services and the rental of any mode of transport. The operators of these platforms will be required to collect and verify certain information on sellers using their platforms and report it to the relevant tax authorities. The information will then be automatically exchanged with the tax authorities of other Member States. The section is the subject of a ministerial decree. The DAC7 will enter into force from 2023. It is expected that the other aspects of the DAC7 will be transposed into the 2022 finance bill.
Digital game credit
As announced in the budget, the bill introduces a new refundable corporate tax credit for the digital games sector. The relief will be available at the rate of 32%, on eligible expenditure up to a ceiling of 25 million euros per project (i.e. tax relief of up to 8 million euros). Eligible expenses include expenses for the design, production and testing of a digital game. A “digital game” is a game that (a) incorporates digital technology; (b) incorporates at least three of the following: text, sound, still images and moving images and moving images; (c) is likely to be published in an electronic medium; and (d) is controlled by software allowing the person playing the game to interact with the dynamics of the game.
A tax credit claim can only be made for a digital game that has been issued with a cultural certificate from the Minister of Tourism, Culture, Arts, Gaeltacht, Sports and Media. Since state aid approval is required from the European Commission before the introduction of this scheme, it will be introduced when issuing a new opening order.
Non-resident business owners receiving Irish rental income are currently subject to income tax (at the rate of 20%). As of January 1, 2022, these non-resident owners will be subject to corporation tax, which will result in an increase in the applicable tax rate from 20% to 25%. These rules are put in place so that non-resident private owners are within the scope of the ILR.
National mergers by absorption – capital gains tax
The bill includes a new TCA 617A to confirm that a domestic merger by absorption does not result in taxable gains. Consequently, in accordance with the applicable law for cross-border EU mergers, the parent company is not considered to transfer the share capital held in the subsidiary before the merger. This removes the need to rely on the substantial exemption of shareholders to avoid a charge to the CGT in the event of a national merger by absorption.
The bill will be debated in the Houses of the Oireachtas (the Irish parliament) and it is likely that further amendments will be made during this process. The final text should be promulgated before the end of 2021.