Ireland's Finance Bill 2015 (the Bill) was published on October 22 2015 and it contains new (previously unannounced) provisions on the Irish tax treatment of Additional Tier 1 (AT1) instruments. The Bill confirms that AT1 instruments qualifying as such under the Capital Requirements Regulations will be regarded as debt instruments.

What are AT1 instruments?

In general terms, AT1 instruments are a form of loss-absorbing capital issued by banks (also known as contingent convertible capital). They are similar in nature to debt instruments but convert to equity or can be written down if bank regulatory capital falls below a specified level.

Change in Revenue policy on deductibility

We understand that in addition to AT1 instruments being regarded as debt, it is intended that the return paid on AT1 instruments will now be deductible. This involves a change to the long-standing practice of the Irish Revenue Commissioners which to date has been to deny deductions for interest paid on all Tier 1 instruments. It is unclear from when this change will apply in practice and whether it will affect AT1 instruments already in issue. Clarification from the Irish Revenue Commissioners on these matters is expected in the near future.

Withholding tax treatment of return paid

In addition, the Bill provides that the return paid on an AT1 instrument shall be treated as interest for Irish tax purposes and that the AT1 instrument will be treated as a quoted Eurobond for withholding tax purposes. Accordingly, as a general rule, AT1 instruments should be exempt from Irish withholding tax (subject to satisfying some additional conditions).

Even though AT1 instruments will be treated as quoted Eurobonds, it is anticipated that banks may choose to list the instruments so that Irish deposit interest retention tax does not apply.

Implications for investors in Irish AT1 instruments

The treatment of the return paid on AT1 instruments as deductible interest may have implications for both Irish and non-Irish resident investors in AT1 instruments issued by Irish banks. For certain Irish resident investors, the change may result in less beneficial tax treatment on receipt of the return. Investors that are not resident in Ireland should consider whether the deductibility of the payment affects the tax treatment of the return in their jurisdiction of residence.

When will the change become effective?

The Bill is due to be enacted before the end of 2015 and the provision will become effective on January 1 2016. It is hoped that the clarification regarding deductibility will be published in the near future.

Authored by Turlough Galvin and Kevin Smith, this article first appeared in the International Tax Review, 15 December 2015.