Ireland refines proposed foreign dividend tax exemption approach

The proposed concession, which forms part of an ongoing consultation, was confirmed in a second feedback statement (20-page / 1.99MB PDF) on the development of the so-called ‘participation exemption’ from Irish corporate tax for foreign dividends, which is due to take effect in January 2025. The department is not, however, amenable to extending the geographical scope of the exemption, despite calls to do in response to its first feedback statement on the new regime.

Tax expert Robert Dever of Pinsent Masons welcomed further progress on the final form of the exemption, which he said would bring Ireland’s corporate tax regime closer into line with those of competitor jurisdictions.

“The complexity and administrative burden resulting from the current tax-and-credit approach has put Ireland at somewhat of a competitive disadvantage up to this point,” he said. “The move to introducing a limited territorial corporate tax regime will bring Ireland into line with the majority of other EU and OECD member states in this area and make Ireland an even more attractive location for multinational investment.”

“It is positive to see that the department has revised its proposal whereby parent companies would have the right to choose annually whether to claim the exemption or not, rather than being locked in for a three-year period after claiming the exemption. However, the appeals for a wider geographic scope for the relief, beyond EU/EEA and tax treaty partner source jurisdictions, have not won over the department at this time,” he said.

Ireland’s corporate tax regime currently considers all profits of a resident entity to be within the scope of Irish tax, regardless of the source of those profits. Businesses which have already paid tax abroad on dividends received from their foreign subsidiaries can instead claim tax relief to avoid double taxation by way of a credit system – an approach which involves additional administrative steps to those required in other jurisdictions, in which some form of exemption from national corporate tax is often available for foreign dividends and even foreign branch profits.

After committing to the introduction of a participation exemption in 2023, the department published an initial ‘strawman’ proposal for feedback earlier this year, setting out how the new regime could work. Its intention is that the regime will run as an ‘opt in’ alongside the current system of double tax relief, allowing taxpayers to continue to use the current system with which they are already familiar as a default position.

The second feedback statement confirms further details of the new exemption, including confirmation that the opt in mechanism will be by way of the company’s annual corporation tax return. A company that chooses to claim the participation exemption must do so in respect of all qualifying dividends – those received from companies that are resident in the EU or EEA, or in jurisdictions with which Ireland has a double taxation agreement in place – received in the relevant accounting period. The statement also sets out potential draft legislative approaches, along with consequential amendments required to existing Irish tax legislation.

Dever said: “If the envisaged rules are enacted, the conditions to constitute a relevant participation will be broadly aligned with the substantial shareholding exemption for capital gains tax purposes.”

“It is likely that all qualifying dividends in the relevant accounting period will be covered where the exemption is claimed, rather than on a dividend-by-dividend basis. However, where a company chooses not to claim the exemption, double tax relief should still be available in line with the current system,” he said.

The Irish government intends to legislate for the participation exemption in this year’s Finance Bill, and for it to take effect from 1 January 2025.

Finance minister Jack Chambers said that introducing the participation exemption would “deliver on the commitment to simplify the Irish corporate tax system”.

“We are in a period of unprecedented change in the international taxation landscape, and enhancement of Ireland’s tax system will provide stakeholders with the certainty and simplicity needed to continue to prosper in Ireland,” he said.

Ireland is continuing to consider the case for the introduction of a complementary exemption for foreign branch profits, according to the latest statement.