What will Budget 2025 mean for corporate tax?

Safeguarding progress and securing future growth

After years of implementing international tax reforms, Budget 2025 and Finance Bill 2024 will likely focus on domestic tax reform, which we hope will be the beginning of a multi-year approach to simplifying the corporate tax system. A key highlight is the introduction of a participation exemption for foreign dividends. This initiative is designed to strengthen Ireland’s appeal as an investment destination and simplify tax compliance for companies.

Introduction of a participation exemption for dividends

The Department of Finance’s commitment to introduce a participation exemption for foreign dividends is a significant step towards simplifying Ireland’s corporate tax system. This competitively designed exemption aims to enhance Ireland’s attractiveness as a destination for inward investment and as a holding location. We commend the ongoing efforts by the Department and Revenue to engage with stakeholders concerning design and implementation. However, it is important that the feedback from stakeholders is adopted in the final legislation to ensure that this regime is competitive. The participation exemption will be introduced in Ireland through Finance Bill 2024.

Given the scale of this change, policymakers have included specific guardrails within the regime. The exemption will apply only to distributions from EU or EEA jurisdictions and those with which Ireland has a double tax agreement (DTA). Stakeholders have advocated for a broader geographical scope to support international investment and align with competitor jurisdictions, but this appears to remain an area for future consideration.

The absence of a similar exemption for foreign branch profits is also a concern. Ireland’s worldwide taxation system is outdated compared to other EU and OECD countries. We urge the Department to address branch taxation promptly to further enhance Ireland’s appeal to foreign direct investors and the financial services sector, where branches are common.

From a Pillar Two perspective, we welcome the alignment between the new participation exemption and the Global Anti-Base Erosion Model (GloBE) rules. The GloBE rules exempt certain dividends from GloBE income. We expect most foreign dividends to qualify as ‘excluded dividends’ under GloBE and the domestic foreign dividend exemption, preventing unnecessary double taxation and simplifying compliance. Introducing a participation exemption for branch profits would further align domestic rules with Pillar Two, ensuring taxation occurs only at the branch location.

Maintaining Ireland’s competitive edge for multinational companies and small and medium enterprises 

Introducing a participation exemption in Ireland is a pivotal first step towards simplifying the corporate tax system. However, a comprehensive review of our direct tax legislation, the Taxes Consolidation Act 1997, is urgently needed to simplify our current laws.

Several areas within the legislation are overly complex, particularly regarding interest deductibility, multiple tax rates, and conditions associated with reliefs such as the R&D tax credit and the Employment Investment Incentive Scheme (EIIS). A proactive approach to simplifying corporate tax is imperative to maintain Ireland’s global competitive edge. Indeed, recent trends indicate that investors prioritise certainty and simplicity in tax regimes when making investment decisions.

The Department of Finance and Revenue are reviewing Ireland’s interest deductibility regime, and plan to engage with stakeholders via a public consultation by the end of Q3 2024. This review will be extensive, considering multiple international tax changes, and will likely span several years. While this initiative is welcome, further efforts are needed to simplify the tax system and reduce compliance burdens to keep Ireland competitive in the race for inward investment. This simplification aligns with broader EU and OECD trends, where policymakers are focused on decluttering and simplifying international tax frameworks. Ireland has a unique opportunity to lead in this area.

Ireland has a strong track record as an attractive business destination. Focusing on tax simplification and reducing compliance complexity would significantly enhance the country’s renowned ability to provide tax certainty and consistency for domestic and multinational entities.

Corporate tax receipts

Exchequer returns to the end of August revealed another strong period for corporate tax receipts. The total receipts collected year to date reached €16.3 billion, an increase of €3.6 billion or 28.4% compared to the same period in 2023. These numbers will significantly impact the overall Budget 2025 package.

However, Ireland faces a concentration risk in corporate tax. The Irish Fiscal Advisory Council (IFAC) recently noted that just three companies account for over 40% of Ireland’s corporate tax revenue. Additional risks include global business challenges, the impact of the housing crisis on investment, the increasing need for infrastructure investment to ensure electricity supply, ongoing international tax reform, and an uncertain US political landscape.

Ireland cannot afford to be complacent in an increasingly uncertain world and a more competitive environment for foreign direct investment (FDI). Proactive measures are essential to attract sustainable investment, jobs and opportunities. With public finances in a strong position, now is an opportune time to introduce initiatives to enhance Ireland’s future prosperity.

Incentivising the provision of housing and the transition to green energy

Two of the biggest challenges facing the State are those of housing and the climate transition. Tax incentives can play a crucial role in alleviating some of the difficulties which Ireland faces in both of these areas. It’s also important to note that investment in these areas would benefit the whole economy and is one of the proactive measures, highlighted above, required to attract FDI.

Modular homes can play a major role in alleviating Ireland’s housing crisis (by increasing stock) and also help in meeting the State’s climate objectives given that the methodology typically produces homes more quickly and more sustainably than traditional construction. Tax measures to support modular construction could include introducing a capital allowances regime similar to that of energy efficient equipment under s.285A TCA, i.e. a 100% upfront deduction for modular equipment and machinery to reduce the tax burden for companies investing in these technologies.

Another measure would be to provide funding for offsite construction-related skills. Reducing stamp duty on new homes built to certain energy efficient standards or built using modular construction would also incentivise quicker and more sustainable forms of construction, and this has also been suggested in the United Kingdom. 

There are many ways in which the State could further incentivise businesses to support our climate goals, acknowledging that the costs of meeting our 2030 targets will rely on securing private investment as well as public funds. PwC has outlined several suggested changes through which the Minister for Finance could influence behavioural change, mobilise private investment and to capitalise on the many opportunities the net-zero transformation presents in our earlier pre-budget submission.