The new rules have been the subject of lengthy stakeholder consultations and form part of a broader modernisation of Ireland’s corporate tax code. The Minister for Finance has indicated that further work will be carried out on a similar exemption for branch profits and a consultation on interest deductibility which we welcome.

Arthur Cox Engagement

Arthur Cox engaged with the Department throughout the stakeholder engagement over the past year and particularly in relation to the draft legislative text that was published in August. Our contributions sought to ensure that a broad, competitive and easy to administer regime was introduced; one that is no more restrictive than our EU partners.

In this regard we welcome the acceptance of our suggestion to move away from the very limited definition of “relevant distribution” in the draft legislation that was based solely on distributions made out of P&L profits (based on the definition in Section 21B(1)(a) TCA). The Finance Bill now helpfully contains a broader definition of a relevant distribution that also includes distributions out of the assets of the relevant subsidiary (where the costs are borne by the subsidiary). The broader definition will likely include all forms of distributions from companies (other than capital distributions, to which the capital gains tax participation exemption would apply anyway, subject to an additional “trading test”).  As most subsidiaries will satisfy the conditions for both tests the form of the distribution from the subsidiary will be largely irrelevant from a practical perspective. 

Another point on which we engaged extensively with the department was the proposed exclusion of distributions made on redeemable shares. The definition of relevant distribution has been amended in the Finance Bill so dividends on redeemable shares can now qualify.

We are disappointed to see that the territorial scope was not extended beyond EU and double tax treaty countries to include all companies within the scope of the Pillar 2 minimum tax regime.  We welcome the comments of the Minister that this will be examined in the coming year once clarity is received from OECD that it will not affect the peer review of Ireland’s implementation of Pillar Two outcome for Ireland.

We set out below some key features of the new regime.

Key features of the new Irish Participation Exemption

The following are some of the key features of the new regime which will be effective for relevant distributions received on or after 1 January 2025.

This is an optional regime; therefore, Ireland’s current “tax and credit” system of rules will remain applicable to taxpayers not falling within the new regime, or for those who choose not to elect to avail of the new regime.

In order to avail of the new regime, the taxpayer must make a claim in its corporation tax return for the accounting period in which the relevant distribution is made, and the election will relate to all relevant distributions in that accounting period.

Criteria

To avail of the exemption, the following condition must be met:

The relevant subsidiary

• Must be resident for tax purposes in an EU/EEA country or a jurisdiction with which Ireland has a double tax treaty and not be generally exempt from the non-Irish tax (excluding a territory that is on the EU list of non-cooperative tax jurisdictions).
  • This residency requirement must be fulfilled on the date the distribution is made and for five years prior to the distribution or since the subsidiary was incorporated or formed.
  • Restrictions apply where in the 5 years preceding the distribution certain changes took place such as merging with or acquiring a business that was not resident in a relevant territory which have the effect of moving profits from non-qualifying countries to qualifying countries.

The relevant parent company and required participation

• The parent company must be resident in Ireland or resident for the purposes of foreign tax in an EEA jurisdiction and not generally exempt from that foreign tax, i.e. it must be within scope of Irish corporation tax.
• It must hold 5% of the ordinary share capital of the relevant subsidiary or be beneficially entitled to not less than 5% of the profits available for distribution to equity holders or beneficially entitled on a winding up.
• The parent must satisfy the holding requirement for an uninterrupted period of at least 12months.
• The ordinary share capital ownership requirement will not be met where the holding is through an intermediary that is not resident in a relevant territory.

The relevant distribution

• The distribution must be made in respect of the relevant subsidiary’s share capital, be treated as income in the hands of the recipient and be made either:
  • out of the “P&L” profits; or
  • out of the assets of the relevant subsidiary so long as the cost of the distribution falls on the relevant subsidiary.

• The meaning of relevant distribution is subject to exclusions such as distributions in a winding up (which can fall within the CGT participation exemption), any interest other income from debt claims providing rights to participate in a company’s profits or any amount considered interest equivalent.

Operation of the exemption

• If the conditions are met the relevant corporation tax that would otherwise be chargeable on the Irish parent company will not arise.
• In the case of distributions made out of the assets of the company, this relief will only apply if the conditions for Section 626B TCA on the capital gain exemption from disposal of certain disposals of shares is satisfied.

Specific Anti-Avoidance

The legislation contains specific anti-avoidance for arrangements or parts of arrangements that are considered not genuine to the extent they were not put in place for calid commercial reasons which reflect economic reality.  This mirrors the exemption in Irish law that implements the Parent/Subsidiary Directive.

Practicalities

In practice a group will likely analyse its subsidiaries under the dividend participation exemption and the CGT participation exemption and then it would be indifferent to the format of a receipt from shares held by the Irish companies in the group.