In April 2024, the Department of Finance published a Strawman Proposal setting out some of the key potential design features of the new Irish participation exemption for foreign dividends, that will be introduced from 1 January 2025.

In its submission, Arthur Cox LLP noted that many of its comments from the previous public consultation were taken into consideration, however not all and while the 100% exemption is welcome, it must be part of a regime that is otherwise as broad and easy to administer as possible.

Ireland is an open economy that relies heavily on foreign direct investment and capital importation, it is imperative that the Irish tax regime remains competitive for maintaining and attracting investment. Ireland has ceded much of its tax competitiveness in recent years, both with a mitigation of the rate differential, and with the increasingly complex and outdated nature of the tax rules.  In a post Pillar Two environment in-scope groups are assessing their global operations and a full and simple participation exemption that will allow the repatriation of profits to facilitate further investment in Irish operations is the preferred approach for both taxpayers and the continuing growth of the Irish economy.

As we set out in our submission, in order to achieve the aim of implementing a simple and easy to administer regime, the following are some of the points that must be considered when drafting proposed legislation:

• The geographic scope should not be limited to dividends received from EU /EEA or jurisdictions with which Ireland has a double taxation agreement. As set out in our previous submission, this exemption is being introduced into a tax code that already has the full suite of ATAD compliant anti-avoidance measures thereby mitigating the need for restrictions based on geographic scope. If a geographic limitation is to be included it should be confined to the EU list of non-cooperative jurisdictions.

• The new regime should be the default, with an option to elect into the existing foreign tax credit system contained in Schedule 24 of the Taxes Consolidation Act 1997 (“TCA”). The election should not be imposed for a 3-year period but on a dividend-by-dividend basis.

• A broad scope inclusion of the nature of in-scope dividends / distributions as proposed in the Strawman, so as to also include income from other corporate rights which are subjected to the same tax treatment as income from shares is welcome.

• Moving away from a delineation of in-scope profits that is confirmed to  ‘trading profits’ is welcome as reliance on this concept causes confusion and uncertainty in an international context where such a concept is not always recognised.
  
• A distinction should not be drawn so as to exclude capital distributions for reasons set out in our submission, namely that a distinction based on concepts that are not internationally recognised leads to tax uncertainty and problems in application for both taxpayers and tax authorities. We also note that the UK initially had the distinction, however, removed the distinction to be applicable regardless of whether the distribution is income or capital in nature.

In addition to looking at the participation exemption Arthur Cox LLP highlighted that this is a sensible time to also look at simplifying and modernising section 626B TCA setting out the exemption from tax in the case of certain capital gains from the disposal of holdings in subsidiaries and the foreign tax credit system contained in Schedule 24 TCA. Finally, the urgent necessity to modernise the rules on interest deductibility was raised.

The submission is available at this link.