Ireland

In general, arm’s-length expenses that are incurred wholly and exclusively for the purposes of the trade are tax-deductible.

Capital items expensed to a company’s profit and loss account are also not tax-deductible. However, depending on the nature of the capital item, they may qualify for tax depreciation (see below).

Depreciation

Book depreciation is not deductible for tax purposes (except in the case of certain IP assets). Instead, tax depreciation (known as capital allowances) is permitted on a straight-line basis in respect of expenditure incurred on assets that have been put into use by the company. The following rates are applicable:

The allowances are calculated on the cost after deduction of grants, except for plant and machinery used in the course of the manufacture of processed food for human consumption. In this case, the allowances are calculated on the gross cost. Allowances on cars are restricted to a capital cost of EUR 24,000 and may be restricted further (to 50% or zero), depending on the level of carbon emissions of the vehicle.In certain circumstances, the Irish transfer pricing rules may apply to the computation of capital allowances and charges.

Accelerated capital allowances

Accelerated capital allowances apply to certain energy-efficient equipment until 31 December 2025. The relief allows for a 100% first-year capital allowance deduction in respect of expenditures incurred on certain approved energy-efficient equipment. This excludes equipment directly operated by fossil fuels from qualifying for the accelerated capital allowances.

Leasing

Ireland operates an eight-year tax depreciation life on most assets. A beneficial tax treatment applies to finance leases and operating leases of certain assets. For short life assets (i.e. those with a life of less than eight years), Ireland allows such lessors to follow the accounting treatment of the transaction that provides a faster write-off of the capital cost of an asset rather than relying on tax depreciation over eight years. This effectively allows the lessors to write-off their capital for tax purposes in line with the economic recovery on the asset.

Goodwill

The amortisation of goodwill is generally not allowable as a deduction. However, a tax deduction may be available for capital expenditure on the acquisition of certain goodwill (see Intellectual property [IP] regime in the Tax credits and incentives section).

Start-up expenses

A deduction may be allowed in respect of pre-trading expenses that are incurred for the purposes of a trade and within three years of the commencement of the trade. Such expenses may be offset against the income of that same trade.

Interest expenses

A deduction for interest is allowed only to the extent that borrowings are used for the purpose of a trade or acquisition of certain non-trading assets. In addition, interest on borrowings between related parties will be subject to Irish transfer pricing rules (including debt capacity and serviceability considerations) as well as Interest Limitation Rules (ILR) (see the Group taxation section).

Research and development (R&D) expenses

Expenditure on scientific R&D and payments for the acquisition of know-how in general are allowable deductions. See R&D tax credit in the Tax credits and incentives section.

Bad debts

A deduction is available for bad debts written off in the accounts of a company as irrecoverable. Specific bad debt provisions may also be deductible once they satisfy Irish GAAP or IFRS accounting standards. The creation of a general bad debt provision is not a deductible expense.

Charitable contributions

Companies are entitled to a deduction, as a trading expense, for qualifying donations to approved charities, educational institutions, schools, churches, research foundations, sports bodies, and other approved organisations that satisfy certain conditions. To qualify for a tax deduction, the donation(s) to an organisation in a 12-month accounting period must amount to at least EUR 250.

Meals and entertainment

Costs incurred for third-party entertainment are not tax-deductible. Entertainment includes the provision of accommodation, food, drink, and any other form of hospitality, including the provision of gifts. Expenditure on bona fide staff entertainment is allowable as a deduction, provided its provision is not incidental to the provision of entertainment to third parties. Certain promotional costs are tax-deductible if they are incurred wholly and exclusively for the purposes of the trade.

Pension expenses

Contributions to certain employee pension schemes and the cost of setting up such schemes are deductible. Pension contributions are allowable as a deduction for employers in the year in which they are paid.

Fines and penalties

Fines and penalties imposed for breaking the law, civil penalties, interest, and late filing surcharges imposed by the Revenue Commissioners are generally not deductible.

Taxes

Taxes that are deductible in computing profits for corporation tax include VAT not recovered, the employer’s share of PRSI contributions, and local taxes (i.e. rates levied on commercial property and local authority charges).

Net operating losses

Losses are computed for tax purposes in the same way as business profits. Trading losses can be offset against other income of any nature, either in the current or preceding accounting period (of equal length). The amount of losses required to shelter the income is dependent on the tax rate that would have been applied to the income in the absence of the loss relief. Any excess losses can be carried forward indefinitely against future trading income. Certain changes in ownership may prevent the carry forward of losses to future periods. Terminal losses that arise within 12 months of the date a company ceases to trade may be carried back three years. 

Payments to foreign affiliates

Generally, deductions can be claimed for royalties, management service charges, and most interest charges paid to foreign affiliates, provided the amounts do not exceed an arm’s-length amount. Depending on the circumstances, certain elections may be required. Ireland does not have any thin capitalisation rules, but arm’s-length debt capacity and serviceability analyses should be considered on related-party transactions.

Anti-hybrid rules

As required by EU Anti-Tax Avoidance Directive 2 (ATAD2), anti-hybrid legislation applies for payments made or arising on or after 1 January 2020 and aims to prevent companies from benefiting from differences in the tax treatment of payments on hybrid financial instruments and on payments by or to hybrid entities. A tax advantage arising from this is referred to as a hybrid mismatch outcome.

Hybrid financial instruments are broadly those that are treated as debt in one jurisdiction but equity in another, while a hybrid entity is typically viewed as opaque in one jurisdiction but transparent in another. This tax system arbitrage resulted in companies qualifying for tax relief on payments that were not being taxed in the hands of the recipient (so-called 'deduction no inclusion' (DNI) outcome) or in qualifying for tax relief in more than one jurisdiction on the same payment (double deduction outcome). The rules deny deductions for such payments or, in certain circumstances, subject them to tax in Ireland.

The rules apply to payments between ‘associated enterprises’, broadly defined as entities in a 25% share capital ownership relationship (increased to 50% in certain circumstances), companies that are included in the same consolidated group for financial account purposes, or companies that exercise significant influence (defined in the Act) over the management of the other.

Once a payment is ‘included’ in the recipient location, no deductibility restrictions apply. The definition of 'inclusion' covers not just payments that are subject to tax in the overseas jurisdiction, but also payments to exempt foreign entities, such as pension funds and government bodies. Furthermore, payments to entities that are located in a jurisdiction that does not impose tax on payments from sources outside that jurisdiction are treated as included. A controlled foreign company (CFC)-type charge imposed under the laws of another territory is also treated as included.

Where a double deduction mismatch outcome arises, no restriction should apply if the payment can be offset against 'dual inclusion income'. This is income that is subject to tax in both Ireland and the jurisdiction where the mismatch arises. While imported mismatches, covering payments that fund hybrid mismatches outside of Ireland, can also result in restrictions, these do not apply where payments are made to other EU member states.

An exception applies that provides that the anti-hybrid rules do not give rise to an adverse unintended issue in certain circumstances. The interaction of the existing legislation with simplification provisions under a foreign CFC regime, whereby certain inter-company payments are disregarded, could potentially give rise to unintended consequences under the existing legislation. The amendment intends to provide that an Irish tax deduction is not denied in this scenario where no economic mismatch outcome arises. The amendment is intended to ensure that a position similar to Revenue’s existing published guidance is now codified as part of the legislation.

The legislation also provides clarification of the provisions in respect of the application of the payment to a hybrid entity where the participator/parent of the recipient of the payment is a tax-exempt entity. The purpose of the amendment is to ensure that, in line with the Base Erosion and Profit Shifting (BEPS) Action 2 Report recommendations, only mismatches that are attributable to hybridity are neutralised by the Irish legislation.

Many of the anti-hybrid provisions only apply to mismatches between associated enterprises. In this context, the Act includes amending provisions relating to the timing of the test of association to address unintended consequences under the current legislation. The Act also includes a technical amendment to the definition of associated enterprises in order to ensure compliance with ATAD.

Reverse-hybrid mismatches 

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. Legislation was also introduced 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' that 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.