Interest Limitation Rules (ILR)
The implementation of ILR is a fundamental change to the Irish tax system and has the ability to restrict deductions for interest expenses (further details on the draft rules can be viewed here). There are a number of provisions included which are of particular importance to the FS sector:
Definition of interest equivalent
A pivotal definition within the ILR rules is ‘interest equivalent’, as a restriction applies only if interest equivalent expense exceeds interest equivalent income. The Finance Bill definition includes not only interest itself but also amounts under derivative instruments connected with the raising of finance, the interest elements of foreign exchange gains and losses and the finance element of finance lease payments.
Also specifically included are the interest equivalent elements of the profit and loss movements on financial assets and liabilities. This is potentially very wide for all industries within FS as it could sweep in all or some of the unrealised fair value movements on a range of financial instruments which might not otherwise be considered as interest or interest equivalent. As there is potential for interpretational differences in this area, it is important that clarifications are provided by way of Revenue guidance, in order to provide a degree of certainty for taxpayers. It is worth noting that these definitions apply to both income and expense amounts.
From an aviation finance perspective, following ongoing engagement with the industry, it is positive that the interest limitation legislation recognises the commercial reality that an element of an aircraft operating lease rental is equivalent to interest income, thereby allowing a lessor to reduce its net interest expense. The proposed rules now allow for a transparent and consistent determination of that interest equivalent. While there are a number of issues that will need to be dealt with in guidance, this critical clarity is to be welcomed.
Inclusion of financial undertakings within the scope of the rules
A carve out for financial undertakings has not been introduced, which is understandable as these entities often generate net interest equivalent income.
Application of the de minimis
The draft legislation provides for a number of exemptions. One of these exemptions relates to situations where a taxpayer’s net borrowing costs do not exceed €3 million. The risk of base erosion is considered low in such a situation. The de minimis threshold applies to the “interest group” as a whole.
While the introduction of this exemption is welcomed, the narrow manner in which it has been introduced is disappointing. Rather than providing for a base exemption of €3 million for taxpayers, it has been introduced as a cliff edge, such that once the €3 million has been exceeded, all net borrowing costs are brought back within scope of the rules where there is no other allowable amount available based on the EBITDA calculation. There is also no marginal relief in such cases.
Single company worldwide group
Bankruptcy remote vehicles, which are common within FS, could potentially have been at a disadvantage as they generally do not meet the definition of a “stand alone entity” nor do they meet the consolidation tests for the group carve outs.
The draft legislation has therefore introduced the concept of “the single company worldwide group”, being a company that is not (1) a member of a worldwide group, (2) a member of an interest group or, (3) a standalone entity.
Where a taxpayer meets the definition above, it can avail of the group carve outs by calculating the relevant ratios as if it was a member of a consolidated group and then adjusting for transactions with associated enterprises (as defined in anti-hybrid legislation).
This is welcome to help ensure such entities are not unfairly disadvantaged, however, analysis of potential associated enterprise transactions will be key in applying these rules.
Reverse Hybrids
Further to the implementation of the anti-hybrid rules in 2020, Finance Bill 2021 outlines the reverse-hybrid provisions (as required under ATAD II), targeting mismatch outcomes typically arising as a result of an entity being considered transparent in Ireland, but opaque in another jurisdiction, resulting in the double non-taxation of a payment. These rules will need to be considered for popular Irish transparent structures such as Irish limited partnerships (both regulated and unregulated) and Common Contractual Funds. Please see our dedicated release covering the introduction of the reverse anti-hybrid rules here.
Ireland’s Sustainable Finance Roadmap
In a Finance Bill which did not include any specific sustainable finance measures, it was at least welcome to see the exemption for long-term infrastructure projects being introduced in the interest limitation rules. See link for detail on other green measures included.
Overhaul of stamp duties on insurance policies and bank products
The Bill contains a number of measures to modernise and streamline the system for collecting stamp duty on insurance policies, financial cards, and cheques / bills of exchange. This should ease the administrative burden for financial institutions / insurers. The Bill also brings these stamp duties within the general stamp duty penalty and enforcement provisions as well as imposing a surcharge where a stamp duty return is delivered late.
Other points to consider
The introduction of the ‘authorised OECD approach’ for the attribution of income to branches in Ireland will be particularly relevant for financial services groups with branches, such as insurers and MiFID firms (see more details in our transfer pricing insight here).
Changes have been made to remove a double tax charge on deposit interest earned by a trust. At present, a trust earning interest on a deposit from which DIRT has been deducted at source is also liable to pay income tax at the standard rate of 20% on such interest. This has now been amended to ensure that a credit is available for the amount withheld in the calculation of the trust's income tax liability.
The bank levy has been extended for a further year, with a review of the scheme to be completed in the next year.
We are here to help you
We are happy to discuss the implications of Finance Bill 2021 for your business. Please reach out to the PwC FS Tax team for any help you require. Contact us today.
