Foreign dividends reform ‘a boost to Ireland’s holding company credentials’

Robert Dever of Pinsent Masons was commenting after the Irish government published its first feedback statement on the issue, including potential features of a new tax exemption it plans to introduce in respect of dividends paid by certain foreign subsidiaries to Irish entities as well as certain foreign companies with an Irish branch or agency.

For businesses, the proposed introduction of the new participation exemption for foreign dividends in Ireland (16-page / 2.13MB PDF) would seek to address the risk of tax  arising twice on dividends received from a foreign subsidiary – first, in respect of profits in the country in which the subsidiary paying the dividend is based, and then in Ireland where the dividend is received.

Currently, Ireland operates a worldwide corporate tax regime which considers all profits, regardless of source, of a resident entity to be within the scope of Irish tax. However, Ireland does offer double taxation relief via a credit system, which serves to reduce what Irish businesses need to pay by way of tax in Ireland in respect of dividends relative to what tax has already been levied on them abroad. Those arrangements mean that it is often the case that either no or negligible incremental tax arises in Ireland on the receipt of group dividends. Nevertheless, the Irish Department of Finance (Department) is exploring the introduction of a participation exemption for foreign dividends with a view to ensuring that Ireland’s corporate tax code is “competitive and attractive to business investment and aligns with international best practice”.

One reason for this is because Ireland is a significant outlier when compared to other EU and the majority of OECD countries, because it does not operate some form of participation exemption for foreign dividends. The introduction of such an exemption in Ireland has been under consideration for several years.

In 2017, a review of Ireland’s corporation tax code conducted by Irish economist Seamus Coffey recommended that consideration be given to the introduction of a participation exemption for foreign dividends and an exemption for foreign branch profits to the Irish tax code. A subsequent consultation was held on the issue and led the Department to publish a roadmap document in September 2023 that set out its intention to introduce a participation exemption for foreign dividends with effect from 1 January 2025.

The Department’s new feedback statement contains a summary of the responses received to consultation questions posed in the roadmap as well as a ‘strawman’ proposal, a hypothetical example for how a participation exemption for foreign dividends might work in Ireland. The Department has opened a consultation until 8 May in respect of that example, clarifying that the proposal “does not purport to be a full realisation of a participation exemption for foreign dividends” but merely “approaches to key building blocks”. It said that once policy decisions have been made on those elements, work can commence on “the finer details” of the exemption regime, with further consultation on that planned.

Dever said that while the proposal being consulted on “cannot be relied upon as an indication of the final measure that will be ultimately introduced”, there are elements of it that “are positive in terms of ensuring that the participation exemption has the desired effect of improving further Ireland’s competitiveness on the global stage”.

In this regard, Dever said that businesses would welcome the fact that the Department’s plans for the full amount of the dividend to be in scope of the exemption as well as the option to choose between electing into the new exemption regime or relying on the existing double tax relief regime in respect of foreign dividends received.

The Department said that the introduction of a participation exemption for foreign dividends “should allow for a significant administrative simplification for companies, as compared to the current system of double tax relief”. It said, though, that while the double tax relief system is “complex”, it is relief that is “effective” and which many taxpayers are “familiar with”. As a result, it said it accepts that some taxpayers “may wish to continue to use this form of relief”.

To accommodate this, it said one possible approach would be for the double tax relief regime to “remain the default mechanism for relief” in respect of foreign dividends but for companies to “have the option to elect in to a participation exemption for a minimum period”. It has suggested that period could be for three years.

Dever also said it is also welcome that the Department does not appear to be planning to restrict the exemption to dividends derived from trading profits.

The proposal is to apply the exemption to “foreign dividends and other types of distributions that represent income from shares or from other rights, not being debt claims, to participate in a company’s profits”. According to the feedback statement, it is envisaged that this will constitute income from other corporate rights which is subjected to the same tax treatment as income from shares by the laws of the state of which the company making the distribution is resident but will not cover capital distributions which could arise, for example, upon the winding up or dissolution of a company.

Dever further welcomed the qualifying criteria suggested for the new exemption, which would require that companies control at least 5% of the ordinary share capital for an uninterrupted period of 12 months up to and including the date of the dividend, which Irish businesses will be familiar with in the context of other tax reliefs, such as the substantial shareholding exemption that already exists under Ireland’s capital gains tax regime. It is also proposed in the feedback statement that dividends in respect of newly acquired participations should also qualify for the exemption provided the shares are subsequently held for a period of up to 12 months after the date of the dividend.

In the feedback statement, the Department does not elaborate on the potential introduction of a complementary exemption for foreign branch profits so it remains to be seen whether such an exemption will be enacted alongside the foreign dividends equivalent this year.

Following the close of the consultation period in May, it is expected that a second feedback statement containing the draft legislative approaches to implement the exemption in respect of foreign dividends will be released by the Department in mid-2024 ahead of the publication of the Finance Bill 2024, which is anticipated in October and to then be signed into law before the end of the year.  The new exemption would then come into effect on 1 January 2025.