The Irish Finance Bill 2019 was published on 17 October 2019 and contains a series of legislative tax measures. The Bill will now progress through a number of stages in the Irish Dáil (the Irish Parliament) before being signed into law by the Irish President by the end of December 2019 (he has signed it on 25 December for the past number of years, presumably mid-festivities).
The Bill contains several significant new tax measures which will affect international investment and securitisation structures located in Ireland and managed by investment firms based around the world. A number of these measures are the result of international tax initiatives such as OECD BEPS and the EU Anti-Tax Avoidance Directive ("ATAD"). These have been anticipated for some time, and the Bill provides for the enactment of these measures into Irish domestic legislation. The measures include "anti-hybrid" rules from ATAD, extended OECD transfer pricing provisions and the EU "DAC 6" tax reporting requirements for certain cross border transactions by intermediaries and in certain cases the taxpayer.
Ireland is the leading jurisdiction in Europe for the location of debt issuance vehicles based on European Central Bank figures. Section 110 of the Irish Taxes Consolidation Act 1997 ("TCA") is the Irish provision that underpins the tax treatment of these companies (known as "qualifying companies" or "Section 110" companies). Section 110 companies are widely used in international financing and fund structures. The Finance Bill has introduced changes to this legislation which become effective on 1 January 2020 and will need to be carefully scrutinised as regards existing and future structures.
1. Section 110 Companies – New Provisions
The Finance Bill proposes certain changes to Section 110 TCA to strengthen the existing anti-avoidance provisions contained in the section.
The most significant change is to the existing definition of "specified person". This is an important definition because certain results dependent or excessive interest payments to a specified person may not be tax deductible unless, broadly, they are subject to tax in an EU country or a country which has a tax treaty with Ireland. The proposed changes mean that a person will also now be considered to be a specified person where they have significant influence over the company and hold more than 20% of any of (i) the share capital of the company, (ii) the principal value of any results dependent securities or (iii) the right to more than 20% of the interest payable on results dependent securities. These changes will become effective on 1 January 2020.
In addition, the existing anti-avoidance provision within Section 110 has been replaced by an objective test which applies to payments or securities entered into as part of a transaction which has as its main purpose, or one of its main purposes, the avoidance of tax. Previously, the anti-avoidance provisions were confined to the avoidance of tax by specified persons.
Finally, as part of the general updating of Ireland's transfer pricing rules, transfer pricing will now apply to Section 110 companies where they transact with associated persons. There is an exclusion for loans where the interest payable exceeds a reasonable commercial return, or is to any extent dependent on the results of the company's business. This is a sensible carve-out as the existing Irish legislation provides that the Section 110 "arm's length test" does not apply to such loans, so transfer pricing requirements would have led to two contradictory legislative provisions. For Section 110 companies which have entered into fixed rate loans or other agreements with associated enterprises, the impact of the transfer pricing regime will need to be considered. This will be relevant in particular to "multi-tiered" company structures.
2. Transfer Pricing
As expected, a number of changes have been made to Ireland's transfer pricing rules. These changes are being introduced, in part, to bring Ireland's transfer pricing legislation in line with the 2017 OECD Transfer Pricing Guidelines and will apply from 1 January 2020.
The key proposals include an extension of the transfer pricing rules to non-trading companies. Currently, Irish transfer pricing rules apply to trading transactions, being transactions which are chargeable to tax under Schedule D Case I or II of the TCA. The new provisions apply to all arrangements which are within the charge to Irish tax and entered into between associated persons. In addition, taxpayers who are within scope must maintain records evidencing their compliance with the arm's length rules. This will, for certain entities, include a requirement to prepare a master file and local file in line with the 2017 OECD Transfer Pricing Guidelines, an additional and potentially costly administrative burden. Of additional note is the introduction of provisions which impose penalties for non-compliance with requests to provide transfer pricing documentation to the Revenue Commissioners. These include a higher rate penalty of €25,000 for the failure to produce a local file which is of relevance to larger taxpayers.
There is no "grandfathering" of historic transactions although there is a modification to the requirements for full transfer pricing documentation for transactions entered into pre-July 2010.
Regulated Irish collective investment funds are not directly within the scope of the new rules, as their profits and gains are not generally within the charge to tax. Section 110 companies are within scope subject to the exception described above for results dependent securities.
The key changes to the Irish rules can be summarized as:
- The application of transfer pricing rules to pre-1 July 2010 arrangements;
- Extending transfer pricing rules to non-trading income and to capital transactions:
(i) Non-Trading Income: the legislation as drafted does not apply where both parties are subject to Irish tax, unless the transaction involves a Section 110 company or involves tax avoidance.
(ii) Capital Transactions: the legislation only applies the arm's length principles to determine the market value of chargeable assets in capital transactions where the transaction value or capital expenditure exceeds €25m.
- Extending transfer pricing rules to small and medium sized businesses (subject to a Ministerial commencement order);
- Enhanced Transfer Pricing Documentation Requirements: there will be a legislative requirement for companies to prepare and maintain a master file and local file in line with Annex I and II of Chapter V of the 2017 OECD Transfer Pricing Guidelines. The provisions include a master file revenue threshold of €250m and a local file threshold of €50m.
3. Irish Property Tax Measures
The Finance Bill sets out more detail on a number of significant property related tax changes which had been announced in the Budget.
As announced on 8 October, stamp duty on commercial property transactions will increase from 6% to 7.5%. There is no change to the rate on residential property. The tax change will also increase the stamp duty rate on sales of shares in certain entities or companies which derive over 50% of their value from Irish commercial property. If the property was acquired or developed for speculative purposes, then this additional stamp duty will be payable.
Investors in Irish Real Estate Investment Trusts ("REITs") should note a number of significant changes to the REIT regime. Firstly, REITs which cease to be part of the REIT regime will no longer be able to rebase their assets unless the REIT has been in existence for over 15 years. This change may make it less attractive to acquire an Irish REIT, given that the purchaser may inherit a latent tax liability within the REIT company. Secondly, dividends from REITs which comprise the proceeds of property disposals will be treated as ordinary distributions. They will be subject to dividend withholding tax at the new rate of 25%. The usual exemptions from dividend withholding tax for non-residents will not apply. Finally, REITs will be subject to tax where they claim deductions for payments which are not wholly or exclusively for the purposes of their property rental business. This provision is intended to prevent REITs from making excessive payments for advisory and other services which are unconnected with their core intended business.
Irish Real Estate Funds ("IREFs"), which are regulated funds investing in Irish property and related assets, are subject to specific measures. These were outlined in detail on 8 October. The changes are likely to be closely reviewed as they progress through the legislative process. Under the provisions set out in the Finance Bill, IREFs will be subject to tax at 20% on certain deemed income. The legislation makes provision for deemed income to arise, if (i) the IREF's leverage exceeds 50% of its original asset costs, (ii) the IREF's interest costs exceeds four times adjusted profits, or (iii) the IREF claims deductions for payments which are not wholly and exclusively for the purposes of its business.
Investors and advisers are likely to raise concerns about the current provisions. The leverage threshold and interest restrictions do not seek to distinguish between third party debt and related party borrowing. In addition, the impact on IREF's undertaking development activity is concerning.
Additional anti-avoidance and compliance obligations are included within the Bill. Specifically these deem income to arise where there are distributions to certain persons holding over 10% of the units in the IREF. This replaces a provision which previously deemed such distributions to be rental income and is understood to be aimed at ensuring that the provisions of Ireland's double tax treaties do not prevent the collection of taxes. In addition, further details will be required and penalties will apply with respect to IREF tax returns, as Revenue seek to ensure that there is appropriate compliance with the new regime.
4. Implementation of EU ATAD Anti-Hybrid Rules
Section 30 of the Finance Bill inserts a new Part 35C into the TCA. This introduces anti-hybrid rules as required by ATAD.
The purpose of anti-hybrid rules is to prevent arrangements that exploit differences in the tax treatment of a financial instrument or an entity under the tax laws of two or more jurisdictions to generate a tax advantage i.e. a "hybrid" situation.
The rules are highly complex and will need to be considered in any international financing structure, especially where an Irish company is making deductible payments, such as under debt funding.
The rules apply to arrangements between associated enterprises. For this purpose, an entity is associated with another entity if it holds a certain percentage (25% or 50% depending on the particular provision) of the shares, voting rights or rights to profits in that other entity, or if there is another entity that holds that percentage in both entities. Two entities will also be associated regardless of the percentage association where they are included in the same consolidated financial statements or if one has significant influence in the management of the other. For this purpose, significant influence means the ability to participate on the board of directors in the financial and operating decisions of an entity.
The rules may also apply to a “structured arrangement” that is not between associated entities, where a mismatch outcome is priced into the terms of an arrangement, or an arrangement is designed to produce a mismatch outcome.
ATAD sets out a number of specific situations that give rise to a hybrid mismatch outcome and each of these situations is provided for separately in the new legislation. The rules are of particular relevance for Irish companies used in fund and financing structures. They could apply whenever such companies make payments that give rise to a tax deduction in Ireland, but no other country taxes the associated receipt by reason of hybridity. This type of mismatch outcome could arise in one of four situations:
(i) The payment is not chargeable to tax due to differences in the characterisation of the payment in Ireland and another territory e.g. the payment is treated as debt in Ireland but equity in the other territory.
(ii) The payment is made to a "hybrid entity" and the mismatch outcome is attributable to differences in the allocation of payments to that entity between the territory in which it is established and the territory in which a participator in that entity is established. This situation could apply where an Irish company makes payments to a company that is disregarded for tax purposes by investors in that company.
(iii) The Irish company is itself a "hybrid entity" and the mismatch outcome is attributable to the fact that payments by the company are disregarded under the laws of the payee territory.
(iv) The rule against imported mismatches applies where the hybrid mismatch does not arise with respect to the transaction entered into by the Irish company but a payment by the Irish company directly or indirectly funds a mismatch outcome arising outside Ireland.
In each of these situations, the Irish company may be denied a deduction for a payment made to an associated entity or as part of a structured arrangement to the extent such payment is not taxed in another territory.
It is important to note that the rules do not require the denial of a deduction if the reason a payment is not taxed is because the other territory does not impose tax or does not generally impose tax on payments received from outside the territory, or if it exempts the payee from tax which generally applies in the territory.
The new legislation also covers mismatch outcomes arising from double deductions, permanent establishments, withholding tax and tax residency. Its scope is therefore potentially very broad. The legislation applies to payments made or arising on or after 1 January 2020. No grandfathering rule applies.
5. Stamp Duty on Schemes of Arrangement
Section 60 of the Finance Bill 2019 has introduced a new anti-avoidance rule with the insertion of section 31D in to the Stamp Duties Consolidation Act, 1999. This provision provides that stamp duty at 1% will apply where Court-approved schemes of arrangement are used in acquiring Irish (target) companies, including real estate companies. These are typically used to take companies private, including REITs.
Where such a scheme arises, the acquirer will be liable to pay stamp duty at 1% of the consideration paid to the shareholders in the target company for the cancellation of their shares in the company. This measure came in to effect as of 9 October 2019.
6. Exit Tax
An additional measure required under the EU Anti-Tax Avoidance Directive was the revision of Ireland's exit tax rules. This led to the introduction of revised rules in the Finance Act 2018. This year's Finance Bill introduces certain technical amendments to those exit tax provisions.
The exit tax provisions impose a charge to Irish tax at a rate of 12.5% on unrealised gains arising where a company migrates its residence or transfers assets outside the charge of Irish tax. This migration or transfer is treated as a deemed disposal of the company's assets.
The key amendment to these provisions extends their scope such that transfers by non-EU companies, which have a permanent establishment in Ireland, will now be captured. Previously, only companies resident in Ireland or another EU Member State were within scope.
In addition, the date of the deemed disposal in respect of a company which migrates out of Ireland has been clarified. The relevant date for these purposes will be the time immediately before the company ceases to be resident in Ireland.
These amendments are applicable to all deemed disposals from 9 October 2019.
7. Implementation of the EU Mandatory Disclosure Regime (DAC6)
EU Directive 2018/822 (colloquially known as DAC6) imposes reporting obligations on intermediaries or taxpayers who enter into certain cross-border arrangements. DAC6 will facilitate the automatic exchange of this information between tax authorities of EU Member States. It is intended to strengthen global tax transparency by detecting potentially aggressive tax planning with an EU cross-border element.
While the stated aim of DAC6 was to aid in the identification of aggressive tax planning arrangements, the scope of the Directive is very wide, potentially applying to transactions where no tax advantage results or transactions which are driven by purely commercial as opposed to tax planning motives.
The Finance Bill introduces a new Chapter 3A in the TCA to give effect to DAC 6. The new provisions largely mirror the rules contained in DAC 6, introducing under Irish law a requirement for "intermediaries" or taxpayers in certain cases to report information to the Revenue Commissioners regarding cross-border arrangements with specific characteristics referred to as "hallmarks". We understand that guidance to the new legislation may be published by Irish Revenue in the first half of 2020.
The new Irish rules come into operation on 1 July 2020 and the first reports will need to be made by 31 August 2020. Importantly, the reporting requirements cover arrangements between 25 June 2018 and 1 July 2020. Where a reportable arrangement is implemented between 25 June 2018 and 1 July 2020, the report to the Irish tax authorities must be undertaken by 31 August 2020. From 1 July 2020, reportable arrangements are required to be reported within 30 days of the earlier date of the arrangement being made available, or made ready for implementation or the first step in implementation being undertaken.
DAC 6 had not set out applicable penalties for non-compliance by intermediaries or taxpayers, leaving these to be defined by the domestic legislation of each EU Member State. The Finance Bill has provided clarification in this regard. Broadly speaking, the level of penalties depends on the type of breach involved. In respect of both intermediaries and taxpayers, a penalty of up to €4,000 may apply in certain cases, with a further penalty between €100 and €500 for each day on which the failure continues depending on the circumstances. Furthermore, the failure by the taxpayer to include the reference number assigned to a reportable cross-border arrangement in a return made by a taxpayer under the new rules exposes a taxpayer to a penalty of up to €5,000.