Marie Brennan ACCA, 10th December 2019
The Irish Finance Bill 2019 was published on 17th October 2019 laying out a series of legislative tax measures. Once it has passed through the Dáil it will be submitted to the Seanad Eireann and then finally passed on to President Higgins to be signed into law. The Finance Bill 2019 is expected to be signed at the end of December as the previous bills have been.
The Irish Finance Bill 2019 includes considerable new tax measures regarding international investment and securitisation structures based in Ireland and managed by global investment firms. The items covered in the Bill follow the current international tax initiatives such as OECD BEPS and the EU Anti-Tax Avoidance Directive (ATAD).
According to the European Central Bank, Ireland is a leading location for Special Purpose Vehicles. The tax treatment of these companies is supported by Section 110 of the Irish Taxes Consolidation Act 1997 (TCA) and are also known as “qualifying companies” or “Section 110” companies”. Special Purpose Vehicles are typically used for international financing and funding structures. The Finance Bill 2019 will come into effect on 1st January 2020 and businesses that utilise Special Purpose Vehicles will need to understand what effects the change in legislation will bring.
The Bill will enact the following measures into Irish legislation:
Changes to Section 110 Companies
To strengthen provisions for tax avoidance the Finance Bill proposes the following changes to Section 110 of the TCA.
- The definition of a Specified Person – Excessive interest payments may not be tax-deductible to Specified Persons unless they are subject to tax in an EU country or a country that holds a tax treaty with Ireland. As of 1st January 2020, a Specified Person will be defined as someone who has significant influence over a company and holds more than 20% of the share capital, principal value, or right to more than 20% of the interest payable on securities.
- The pre-existing anti-avoidance provision of Section 110 is being replaced by an objective test.
‘Anti-avoidance’ provisions under previous legislation is limited to the avoidance of tax by specified persons.
‘Objective test’ provisions under the new legislation is extended to include when the main purpose of a transaction involving payments or securities is to avoid tax.
- Transfer pricing refers to the valuations of cross-border transactions between associated enterprises for tax purposes.
- Transfer pricing regime will apply to Section 110 companies where they have transactions with associated persons and will also need to be considered when entering into fixed-rate loans or other agreements with associated enterprises. This update is particularly relevant to multi-tiered company structures.
From 1st January 2020, a number of changes will apply to transfer pricing rules to bring Ireland’s legislation in line with the 2017 OECD Transfer Pricing Guidelines. Transfer pricing rules will now apply to non-trading companies and capital transactions, as well as small and medium-sized businesses. It should be noted that this will not apply to non-trading income where the parties involved are subject to Irish tax (other than those highlighted as Section 110 companies or for tax avoidance purposes). Otherwise, the rules will apply to all provisions, not just trading transactions, which are chargeable under the TCA.
Additionally, in scope taxpayers must maintain records as evidence of compliance with ‘arm’s length rules’. These records can include maintaining a master file and a local file and penalties will apply for non-compliance when such pricing documentation is requested by Revenue Commissioners.
Changes for Irish Real Estate Investment Trusts (REITs). Investors will no longer be able to rebase their assets when a REIT is over 15 years old. This could make REITs less attractive because a purchaser could inherit latent tax liabilities. Dividends from property disposal will be treated as ordinary distributions and subject to Dividend Withholding Tax at the new rate of 25% and exemptions for non-residents will not apply subject to possible treaty relief. When deductions are claimed they will be subject to tax if the purchases were not exclusively for their property rental business.
Regulated Irish property investments, known as, Irish Real Estate Funds (IREFs) will be subject to tax at 20% on the following ‘deemed income’ situations:
- Leverage exceeds 50% of the original asset cost
- Interest costs exceed four times adjusted profits
- Deductions claims which are not exclusively for the business
- Compliance obligations will apply to persons holding more than 10% of the units.
Stamp duty on non-residential property has also increased from 6% to 7.5%, this was brought into effect from 09th October 2019. If an existing contract was in place before this date and the instrument was executed prior to 01 January 2020 then the rate of 6% would apply.
Hybrid mismatches exploit the differences between 2 or more tax systems and under the Anti-Tax Avoidance Directive (ATAD) rule taxpayers are prevented from engaging in tax system arbitrage.
These rules apply between the following associated enterprises;
- Where one entity holds a certain percentage of shares or voting rights in another entity,
- another entity holds that percentage in both entities
- two entities are included on the same consolidated financial statements, or
- one entity holds significant influence/control over the other.
An Irish company may be denied a deduction for payments made to an associated entity as per the mismatch outcome arising in one of four situations;
- Taxation is avoided when payment characteristics are considered differently in the participating territories (i.e. debt vs. equity)
- A payment is made to a hybrid entity and such a mismatch outcome is due to one of the entities being disregarded by international investors for tax purposes
- The Irish company itself is a hybrid entity and taxation is avoided when the laws associated with the investor cause it to be disregarded
- When a payment by an Irish company directly or indirectly funds a mismatch outcome reaching outside territories
The new Finance Bill 2019 rules have the potential to be very broad by further making accountable mismatches arising from double deductions, permanent establishments, withholding tax and tax residency.
If, however, tax is not usually imposed on such payments as per the laws of the other territory, these rules may not apply.
Stamp Duty on Schemes of Arrangement
As part of the new anti-avoidance rule in section 60 of the Finance Bill 2019, a stamp duty of 1% will now apply to the acquisition of Irish companies that use Court approved schemes of arrangement. Often used when a company undergoes privatisation, this will also include real estate companies. The addition of section 31D to the Stamp Duties Consolidation Act 1999 deems that for any consideration paid to the shareholders for the cancellation of shares in the target company, a stamp duty of 1% is liable to be paid by the acquirer.
Amendments to exit tax provisions included in the Finance Act 2018 will also be introduced to this year’s Irish Finance Bill 2019.
Originally applying solely to companies’ resident in Ireland or EU Member States, the tax of 12.5% on unrealised gains will now include non-EU companies who have a permanent establishment in Ireland and who move or transfer residence outside of Ireland. This migration or transfer is considered a deemed disposal of a company’s assets and is dated from such a time immediately prior to the company ceasing to be resident in Ireland.
Implementation of the EU Mandatory Disclosure Regime
An initiative to highlight tax avoidance in cross border arrangements, the EU Directive 2018/822 or ‘DAC 6’ will impose new obligations on taxpayers to report on such exchanges.
This can include transactions that have no obvious tax advantages and those with more commercial motives.
In some circumstances, taxpayers will be required to report within 30 days to the Revenue Commissioners on any cross-border arrangements that carry certain ‘hallmarks’. It is understood that guidelines from Revenue may be published by mid-2020 to assist with this new legislation, however further important dates include; 1 July 2020 when the new rules commence and 31 August 2020 when relevant reports (of arrangements made between 25 June 2018 and 1 July 2020) are to be submitted.
Penalties for non-compliance range from €100 – €5,000 depending on circumstances and will be defined by the individual EU Member States. For Ireland, the Finance Bill 2019 has highlighted penalties for tax-payers and intermediaries who fail to include a relevant reference number on a report and daily fines for continual failure to report.
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