Irish Government Consultation on the New EU Interest Limitation Rule

The Irish legislation that will be introduced after the consultation process will enact the interest limitation rule into Irish law as required by the EU Anti-Tax Avoidance Directive (Council Directive 2016/1164) (“ATAD”).  The first phase of the consultation will run until 18 March 2021.  The Irish legislation would be published in the Finance Bill 2021 in the autumn of 2021. Therefore, 1 January 2022 would be the likely commencement date of the legislation.

The consultation represents an important opportunity for business to raise any issues with Irish Revenue and the Department of Finance in respect of this complex change. Historically, Ireland has not had a formulaic or fixed interest limitation rule, and this new measure had been described as the most significant change to the Irish tax system in 20 years.  The impact of the change could be material to many business sectors, including real estate, aviation, structured finance, securitisation, and investment fund and private equity structures.

Background

The EU Council adopted ATAD on 12 July 2016, as part of its anti-tax avoidance package and to provide a framework for a harmonised implementation of the OECD BEPS action plan across the EU. EU Member States had until 31 December 2018 to implement the interest limitation rule.  However, EU Member States which already had equivalent measures in their domestic law could claim a derogation from the introduction of the interest limitation rule until 2024.  Ireland had sought such a derogation on the basis of its extensive legislation governing interest withholding and deductibility, however, the EU Commission disagreed with this which has led to the expected earlier implementation.

Interest Limitation Rule

The interest limitation rule will restrict the tax deductible interest of an entity to 30% of its earnings before interest, tax, depreciation and amortisation (“EBITDA”) in a tax period.  It is expected that Ireland would introduce a ‘safe harbour’ permitted under ATAD to allow for deductibility up to €3 million if that is higher than the 30% limit. The interest limitation only applies to the ‘net borrowing costs’ of an entity, which is the amount by which its borrowing costs exceed its taxable ‘interest’ revenues and other ‘economically equivalent’ taxable revenues.

The Department of Finance has said that due to the complexity of the interest limitation rule and its interaction with existing Irish legislation, a two- stage approach is being taken.  The Department has said that it is intended first to develop a robust legislative approach to the operation of the interest limitation rule, including carry-forward provisions, on a single company basis, and this is the focus of the consultation published today.

It continued by saying that when the framework of the interest limitation and carry-forward on a single company basis is firmly established, legislative approaches will then be developed to consider the notional local group and group ratio options, and that the consultation contains questions on a range of technical and policy issues relevant to the development of those options.

Key Concepts

Based on an earlier consultation with Irish Government in 2019 and our experience from working with clients, a number of areas are likely to be of key focus. These include:

(a) The definition of interest and income that is ‘economically equivalent’ to interest;

(b) The definition of ‘financial undertakings’ that will be excluded from the interest limitation rule;

(c) The application of any special rules and ‘safe harbours’ for groups of companies, and the meaning of a ‘standalone entity’; and

(d) The situation for pre-existing finance which was put in place prior to ATAD and prior to the most recent announcements that the date of implementation was to be introduced earlier than expected in Ireland.

Maples Group

The Maples Group will be closely involved in all aspects of the Government consultation on behalf of our clients, Irish industry bodies and related stakeholders. We can provide guidance to clients on the consultation, assist them in feeding in their comments, and work with clients to assess the possible impact of the interest limitation rule on existing and future structures.

For further information, please liaise with your usual Maples Group contact or the contacts below.