Interest Limitation Rules (ILR)
Finance Act 2021 introduced rules in relation to the deductibility of interest to transpose Ireland’s remaining EU ATAD measures. The Interest Limitation Rules (“ILR”), applying to accounting periods commencing on or after 1 January 2022, aims to limit base erosion through the excessive use of interest deductions by linking a taxpayer’s allowable net borrowing/interest costs directly to its level of earnings. The provisions of ILR will operate alongside existing rules that restrict the deductibility of interest expenses.
The maximum corporation tax deduction available under these rules for net borrowing/interest costs is limited to 30% of tax-adjusted earnings before tax and before deductions for net interest expense, depreciation and amortization (EBITDA) subject to some exceptions. While the default rate of the fixed ratio is set at 30%, a taxpayer may in certain circumstances elect to deduct an amount in excess of 30% of tax-adjusted EBITDA under the “group ratio” rule. The group ratio is calculated as Group exceeding borrowing costs / Group EBITDA.
Ireland will apply the rules using a “group approach”, that is, calculating the interest restriction at the level of a local group of companies (“interest group”). The legislation provides that the “interest group” will encompass all companies within the charge to corporation tax in Ireland that are members of a financial consolidation group as well as any non-consolidated companies that are members of a tax loss group for Irish corporation tax purposes and have elected to join the interest group. If interest payments are restricted under the ILR in an accounting period, then the excess can be carried forward indefinitely and deducted as a “deemed borrowing cost” against taxable income subject to capacity in future periods. If, in an accounting period, there is spare capacity it can be carried forward for a period of up to 60 months from the end of the accounting period in which it arose.
The new rules do not apply to loans concluded before 17 June 2016, that is, before the terms of the ILR were agreed. There is also an exemption where a taxpayer’s net borrowing costs do not exceed €3 million. This €3 million de minimis threshold applies to the “interest group” as a whole.
The provisions also provide for an equity-escape carve-out from the interest limitation rules. If the ratio of equity to total assets of the interest group is no lower than two percentage points below the worldwide group’s ratio of equity to total assets then the equity ratio rule applies and no interest restriction should arise.
Reverse Hybrid Mismatches
Anti-Hybrid provisions were introduced into Irish tax legislation as required by the EU ATAD. The first and most substantial part of the anti-hybrid rules was introduced in Finance Act 2019 and entered into effect on 1 January 2020 as mandated by ATAD II. These rules dealt with the main categories of hybrid mismatch outcomes such as “deduction without inclusion” mismatch outcomes, “double deduction” mismatch outcomes, “permanent establishment” mismatch outcomes and “imported” mismatches, and required Irish companies to review and consider each tax-deductible payment made to identify if a mismatch outcome has arisen, which would need to be neutralised under the anti-hybrid legislation.
ATAD further required the implementation of anti-hybrid rules targeting what are known as “reverse hybrid mismatches” into EU Member States’ domestic law by no later than 1 January 2022, and accordingly, Finance Act 2021 introduced legislation to target reverse hybrid mismatches, with the rules effective for tax periods commencing on or after 1 January 2022.
At a high-level, a reverse hybrid mismatch can arise where an entity is treated as tax transparent in the territory in which it is established but is treated as a separate taxable person by some, or all, of its owners, with the result being that some, or all, of the income or gains of the entity goes untaxed in any jurisdiction. The primary effect of the reverse hybrid provisions is that, where they apply, income or gains, of a “reverse hybrid entity” which would not have previously been taxable in Ireland, e.g. on the basis that the entity was viewed as a tax transparent vehicle such as an Irish partnership, may become taxable in Ireland in the same manner as a company resident in Ireland.
Mandatory Exchange of Information for Digital Platform Operators (DAC7)
Finance Act 2021 transposed the EU tax transparency rules for digital platform operators (DAC7) into Irish law. New automatic reporting obligations will apply to digital platform operators with an EU nexus and to non-EU operators that facilitate the use of a platform by EU residents or the rental of immovable property located in the EU by any user. The new rules aim to provide EU Member States’ tax authorities with information to monitor compliance with tax rules for commercial activities performed on digital platforms and identify situations where tax should be paid. The reporting requirements are standardised across the EU and the legislation seeks to reduce the administrative burden on operators by requiring platforms to report in only one EU Member State where they have operations in multiple jurisdictions. The rules will take effect from 1 January 2023 with the first reporting due in January 2024.
Digital Gaming Credit
As the digital gaming industry continues to see exponential growth, legislation has been added in Finance Act 2021 to provide for the introduction of a digital gaming sector tax credit.However, this new legislation is subject to a ministerial commencement order as it requires EU state aid approval.
To encourage innovation and creativity, the digital gaming tax credit is intended to support digital games development companies by providing a refundable corporation tax credit for expenditures incurred on game design, production and testing. The credit is intended to be available at a rate of 32% of qualifying expenditure, subject to a maximum spend of €25 million per project and a minimum spend of €100,000. A tax credit of up to €8 million per project will potentially, therefore, be available. To qualify for relief, the digital gaming company will need to go through a certification procedure and meet various other conditions, including conditions related to record keeping and ensuring that funding comes from either EU or double tax treaty partner sources.