Plans for participation exemption to Irish corporation tax
The Government has announced plans to introduce changes to how dividend income received from foreign branches of companies with bases in Ireland are taxed here.
The reforms, if implemented, will mean qualifying dividend income that is transferred here from a foreign company within a company group will from 2025 be exempt from tax in Ireland.
Currently, that income is fully taxed in this jurisdiction and then a credit is given for the tax already paid in the foreign country from where the payment came, through a double taxation agreement.
The development follows calls over many years by large multinational firms with bases in Ireland for such a so-called “participation exemption” to be introduced, because it would be far simpler than the current system which requires considerable administration.
Ireland is currently a significant outlier, being the only EU country and one of a very small number of OECD countries that does not have some form of participation exemption for foreign dividends, according to the Department of Finance.
The 2017 Review of Ireland’s Corporation Tax Code, by economist Seamus Coffey, recommended that it would be timely to consider introducing a participation exemption for foreign dividends and/or foreign branch profits to the Irish tax code.
Minister for Finance, Michael McGrath, said the expectation is that the change would have neither a positive nor a negative effect on Ireland’s corporation tax take and would be net neutral.
“The source of the dividend is from after tax profits,” he told RTÉ News.
“So tax already has been paid in the jurisdiction from where the dividend has come. And so that is the essential basis of the new arrangement.”
The Department of Finance has published a roadmap for the introduction of the participation exemption to corporation tax and has launched a consultation process on the plans.
It is proposed that the change would be legislated for in the Finance Bill in autumn of next year and would take effect from 2025.
“There is a lot of detail that has to be constructed now in the design stage,” Mr McGrath said.
“There will be consultation, we will have feedback statements and we will continue with the practice of engaging, having public consultation, having collaboration with stakeholders to make sure we get the detail right.”
“But this change has been a consistent ask of the foreign direct investment community because Ireland is currently an outlier in the European Union and even among OECD member countries in not having a dividend exemption in those circumstances.”
“So we will now be providing that and I think it does offer certainty and predictability in relation to our corporate tax offering into the future for people who are investing a lot of money in Ireland.”
While the roadmap and consultation also includes proposals for a participation exemption for branch profits, the roadmap says this would be considerably more complex with a broader range of policy considerations and potential consequential impacts to be considered by Government and businesses.
But it also says it does merit further investigation and “the intention over the coming months is to investigate what it might look like and what it might be used for.”
Employer’s group Ibec welcomed news of the decision but said it could have happened sooner.
“Today’s announcement is a positive development in a move toward simplifying Ireland’s increasingly complex tax system, relative to our competitors,” said Gerard Brady, Ibec Head of National Policy and Chief Economist.
“Whilst today’s commitment to introduce changes from 2025 onwards is positive, it is a missed opportunity that these changes will not be introduced in the upcoming Finance Bill, to coincide with the adoption of the new EU Minimum Tax Directive.”
“In recent years, all barriers to their change have been removed and the business community has engaged intensively regarding the details of implementation.”
In January, the State will implement Pillar 2 of the OECD agreement on corporation tax reform, by introducing a top up tax for large businesses that have an annual turnover of €750m a year or more, to bring their effective corporation tax rate up to 15% from the current 12.5%.
“Implementing the OECD agreements on corporate tax will reduce the rate differential for Ireland’s corporate tax regime from 2024 onwards,” Gerard Brady said.
“Given the scale of employment generated and tax paid in the country, by both inbound MNEs and Irish Headquartered companies, it is crucial that businesses hear a clear message over the coming months on Ireland’s commitment to competitiveness in other elements of the regime, including the simplification of an increasingly administratively complex tax system.”
Meanwhile, the Minister for Finance has said he does not expect corporation tax to come in lower than previously forecast for the year, despite a notable dip in August.
But Michael McGrath also said he has no reason to believe corporation tax receipts will overshoot estimates this year either.
“The forecast that my department provided back in April for corporate tax receipts this year was in excess of €24 billion which would be up 7% on the 2022 level of receipts,” he told RTÉ News.
“And notwithstanding the reduction in receipts in August, receipts year to date are up 7% year on year.”
“So as you can see, despite the volatility and the uncertainty – and you can never be sure about what will come in in the months ahead – we remain on track we believe to broadly come in on target, which is for corporate tax receipts of over €24 billion for 2023.”
However, he added that volatility in the receipts still remains.