Finance (No.2) Act 2023 included the Irish legislative provisions to implement the Pillar Two GloBE rule, that is, IIR and UTPR. Pillar Two aims to ensure that in-scope businesses (those with consolidated group revenues of €750m or more in at least two of the four preceding fiscal years) pay at least a 15% effective tax rate on their profits in each jurisdiction they operate in. The rules apply for in-scope businesses with accounting periods beginning on or after 31 December 2023.
The Pillar Two measures as set out in the Act are derived from the OECD model rules and the EU Directive. However, the rules are further supplemented through the OECD guidance. In this regard, the legislation includes measures derived from existing OECD guidance and it also anticipates that further OECD guidance will be released over time and is drafted in a manner that caters for that.
When introducing the rules, Ireland legislated for a Qualified Domestic Top-up Tax (QDTT).
Finance (No.2) Act 2023 includes new measures on the tax treatment of distributions (including dividends), royalties and interest payments to recipients in no-tax and zero tax jurisdictions as well as those included on the EU list of non-cooperative jurisdictions. The legislation is intended to apply for payments of certain dividends, royalties and interest to associated entities made on or after 1 April 2024. However, there are grandfathering provisions that apply to arrangements which were in place on or before 19 October 2023. As a result, the new measures will not apply to any such grandfathered payments until 1 January 2025.
The new legislation will limit the operation of certain domestic withholding tax exemptions in respect of captured payments, as well as requiring the reporting of these payments. The new measures provide that withholding tax should be applied on applicable payments by Irish companies to associated entities that are resident in no-tax, zero-tax or non-cooperative jurisdictions. Entities are associated by virtue of one entity having control of the other or both are under the control of another entity or where one entity has “definite influence” in the management of another entity. One of the conditions for interest and royalty payments to be in scope of the new rules is that the amount has or can be deducted in computing profits for corporation tax purposes.
Furthermore, the new legislation introduces the concept of an “excluded payment”, whereby the rules do not apply to any of the captured payments in scenarios, broadly speaking, where there is no double non-taxation. There is a further carve out for interest payments where the entity to whom the interest was made, subsequently makes a payment of a corresponding amount within a defined time period to a person to whom such payment (had it been made directly by the Irish company) would have been considered an excluded payment. This particular exclusion is subject to a bona fide commercial purposes test. The interaction between the outbound payments rule and Pillar Two also needs to be considered carefully, as the rules do not apply where the recipient is subject to a “supplemental tax”, such as those contained in the Pillar Two regime.
Taxation of Leases
Finance (No.2) Act 2023 introduced a number of amendments relevant to the leasing industry, the aim of which was to legislate for certain areas that had historically been governed by Irish Revenue practice and to update and provide clarity in a number of Sections.
The Act included some changes and updates within the legislation, commonly referred to as the ring-fencing provision for leasing. The amendments to this legislation are helpful in clarifying the operation of it, and the updates have been made with the view to ensuring the legislation is more reflective of the commercial reality of both the construct of, and activities undertaken by, a modern leasing business.
Meanwhile, there have been a number of amendments introduced, which apply to the finance leasing industry, the overall impact of such may not be material but the additional disclosure requirements should be considered in detail. Please see further detail in the “Taxation of Leases” section below.
The Act has helpfully also introduced a provision to address concerns surrounding the deductibility of interest expenses in circumstances where an entity engaged in aircraft leasing activity may be considered non-trading for Irish corporation tax purposes.
R&D Tax Credit
Finance (No.2) Act 2023 Act legislates for an increase in the headline rate of the R&D credit from 25% to 30%. The increase in the headline R&D tax credit rate will ensure no net impact of the taxation of the R&D tax credit under the Pillar Two GloBE rules.
Stamp Duty - Electronic Transfers
Finance (No.2) Act 2023 introduced an exemption for any electronic transfers of interests in Irish shares within central securities depositories in the US and Canada, where those shares are dealt in on a recognised stock exchange in either of those countries. Prior to this, taxpayers had to seek Revenue confirmation on a case-by-case basis that the ADR exemption, an exemption originally introduced specifically for transfers of American Depository Receipts, could apply to such electronic transfers.
Public Country-by-Country Reporting
The EU Directive 2021/2101/EU was transposed into Irish law by way of a statutory instrument effective from 22 June 2023. It requires public disclosure of certain financial and non-financial information by EU and non-EU multinational enterprises doing business in the EU through a branch or a subsidiary with global turnover exceeding €750m in each of the last two consecutive financial years.