On September 14, 2023 the Irish Department of Finance published a Roadmap for the Introduction of a Participation Exemption into the Irish Corporation Tax and opened a public technical consultation. The consultation period will run from September 14, 2023 to December 13, 2023. The technical consultation regards the introduction of a Participation Exemption and a potential introduction of an exemption for foreign branch profits in the Irish Corporation Tax.

Background information

A foreign dividend participation exemption

A participation exemption for foreign-sourced dividends is a double taxation relief measure, which  operates  by  exempting  certain  qualifying  foreign  dividend  income  received  from corporation tax in the hands ofthe recipient.

Ireland is  currently  a  significant  outlier,  being  the  only  EU  country  and  one  of  a  very  small number  of OECD  countries  that  does  not  operate  some form  of  participation  exemption for foreign dividends. Ireland operates what is referred to as a “tax and credit” system, whereby dividends received are subject to Irish corporation tax, but credit is given in Ireland for tax paid in  other  jurisdictions,  up  to  the  amount  of  Irish  tax  payable  on  the  income.  Given  our competitive  corporation  tax  rate  and  our  comprehensive  double  tax  relief  provisions,  it  is commonly reported that no or negligible incremental tax in Ireland arises on group dividends received. Furthermore, the implementation of the Pillar Two minimum effective tax rate from 2024,  introducing  a  15%  minimum tax  rate  on  a jurisdictional  basis globally,  is  expected  to lead to increased taxes incurred in other jurisdictions thatwould in turn qualify for double tax relief, further negating any potential for incremental tax in Ireland on foreign dividend income received.

A Foreign branch profits exemption

Income  and  capital  gains  arising  in  a  permanent  establishment  of  an  Irish  company  are generally subject to corporation tax in Ireland on an arising basis. This would include the profits of foreign branches of an Irish company.  As a primary taxing right would generally also apply in the foreign jurisdiction, double tax relief is available for foreign tax suffered in the source jurisdiction, up to the amount of Irish tax payable on thoseprofits. A branch profits exemption is an alternative method for double tax relief which provides an exemption for branch income and/or gains, to the extent chosen and subject to conditions.

Foreign branch exemptions are a feature of many tax regimes globally, albeit that they are not as common as foreign dividend participation exemptions.

Timeline

The Department of finance has set out the following deadlines:

Consultation questions

The 61 consultation questions are divided in 2 parts. The first set of 53 consultation questions regard the introduction of a Participation Exemption into the Irish Corporation Tax. The remaining 8 questions a Foreign branch exemption.

The questions regarding the introduction of a Participation Exemption into the Irish Corporation Tax are divide into the following sub-sections:

• Structural Considerations
  • General Features (4 questions)
  • Specified jurisdictions (3 questions)
  • Method of relief (1 question)
  • Relief for the full amount or only part of the dividend (1 question)
  • Type of dividend/distribution and shares (4 questions)
  • Minimum shareholding requirements (3 questions)
  • Optionality (7 questions)
  • Interest limitation (1 question)
  • Subject to taxrule (1 question)
  • Substance in Ireland (1 question)
  • Trading requirement (2 questions)
  • Transitional arrangements (3 questions)
• Consequential impacts
  • Franked investment income (2 questions)
  • Portfolio investors (4 questions)
  • Alignment with existing Irish reliefs for foreign subsidiaries (3 questions)
  • Deductibility of expenses related to exempt income (1 question)
  • Close company surcharge (1 question)
  • Specific tax regimes (2 questions)
• Anti-avoidance rules (2 questions)
  • Controlled Foreign Companies (1 question)
  • Anti-hybrids / Non deductibility in payor jurisdiction rule (2 questions)
  • Interaction with Pillar II of the OECD Inclusive Framework (1 question)
  • Transfer Pricing (1 question)
  • Multilateral Instrument provisions (1 question)
• Any other issues (1 question)

The document containing the roadmap for the Introduction of a Participation Exemption in the Irish Corporation Tax and the consultation document can be found here.

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