The Finance Bill 2021 (the “Finance Bill”) was published on 21 October 2021 and covers the implementation and adoption of the EU Anti-Tax Avoidance Directive (“ATAD”) into Irish tax legislation.
The amendments/provisions will be effective for the accounting period beginning on or after 1 January 2022. The key provisions impacting the financial services sector are in respect of interest limitation rules and the treatment of reverse hybrids.
To implement the Interest Limitation Rules (“ILR”) as required by ATAD, the Finance Bill introduces Part 35D into the Taxes Consolidation Act 1997. The ILR limits the maximum tax deduction for net borrowing costs to 30% of EBITDA, as measured under tax principles (ignoring any losses carried forward, back or group relief).
There are four exemptions to this:
A key definition within the ILR rules is of ‘interest equivalent’, as a restriction applies only if an interest equivalent expense exceeds the interest equivalent income. The Finance Bill definition includes, in addition to the interest itself, any amounts under derivative instruments connected with the raising of finance, the interest elements of foreign exchange gains and losses, and the finance element of finance lease payments. Also specifically included are the interest equivalent elements of the profit and loss movements on financial assets and liabilities.
The Finance Bill has introduced the concept of “the single company worldwide group”, being a company that is not:
(1) a member of a worldwide group (consolidation under accounting principles),
(2) a member of an interest group or,
(3) a standalone entity.
Where a company meets this definition, that company can elect to join an “interest group”, resulting in ILR calculations being done at the local group level. The group can then choose the allocation between any disallowed interest between its members.
The Finance Bill has amended the definition of an entity to better conform to the ATAD definition and now includes:
The Finance Bill has also included a definition for “consolidated group for financial accounting purposes”, into Section 835AA TCA 1997, which relates to associated companies.
A consolidated group for financial accounting purposes per the definition will consist of:
These amended definitions are also relevant for the interest limitation rules.
To address tax mismatches that arise where an Irish entity is a reverse hybrid entity, reverse anti-hybrid rules have been introduced in the Finance Bill.
The anti-reverse hybrid rules bring certain tax transparent entities (such as Irish limited partnerships and Common Contractual Funds) within the scope of Irish corporation tax. A reverse hybrid mismatch arises where some or all the profits or gains of a reverse hybrid entity are not subject to Irish tax or foreign tax.
Irish corporation tax on the reverse hybrid entity in respect of such profits and gains is imposed to neutralise the mismatch. The following are exemptions where reverse hybrid outcome will not arise:
The rules provide an exemption for Collective Investment Schemes that are subject to investor-protection regulation, are widely held and hold a diversified portfolio of assets.
These changes bring the EU Anti-Tax Avoidance Directive into Irish law and position Ireland firmly amongst its EU peers in ensuring that entities limit base erosion and prevent tax system arbitrage.
We offer clients a one-stop-shop service model across the alternative assets sector to comply with the obligations under the Finance Bill. Our team has a proven track record in assisting clients and entities administered through new taxation and compliance requirements. We take an active role in industry consultations and disseminating our knowledge into the market, including presenting external training events.