Ireland published Finance Bill 2019 on 17 October 2019. The Bill includes provisions to implement previously announced changes to Ireland’s transfer pricing regime and the introduction of anti-hybrid rules. The Bill also introduces new provisions that apply to Irish real estate funds, real estate investment and section 110 companies. We have outlined the key changes below.
The changes to Ireland’s transfer pricing rules are in line with what was announced last month. For chargeable periods commencing on or after 1 January 2020, the transfer pricing rules will apply to non-trading transactions, save for certain Irish-to-Irish non-trading transactions. In addition, the grandfathering that existed for transactions agreed before 1 July 2010 will be removed. The transfer pricing legislation will incorporate by reference the 2017 OECD Transfer Pricing Guidelines, the OECD Guidance issued in 2018 on Hard to Value Intangibles and the OECD Guidance issued in 2018 on the Transactional Profit Split Method. In addition, the documentation requirements will be updated so that master files and local files will have to be prepared (subject to certain financial thresholds) and an express timeline for the preparation of supporting documentation is included in the legislation. You can read more about the changes announced last month in our client briefing.
The Bill also includes some transfer pricing changes that were not announced last month. Notably, the rules now provide that taxpayers who make a reasonable effort to comply with the transfer pricing rules can be protected from tax-geared penalties in the event of a transfer pricing adjustment. In addition, new penalty provisions provide for a €25,000 penalty if a request by Revenue for supporting transfer pricing documentation is not satisfied (daily penalties can also be applied).
In line with obligations under the EU Anti-Tax Avoidance Directives, the Bill implements anti-hybrid rules. The rules will apply to payments made or arising on or after 1 January 2020.
The anti-hybrid rules are designed to apply to arrangements made between associated enterprises. Parties can be associated if shareholding, voting rights or profit distribution thresholds are met, or if the entities are consolidated for accounting purposes, or if one entity has “significant influence in the management of the other”. That final concept is defined to cover circumstances where an entity has the right to participate on the board of directors of another entity or in the “financial and operating policy decisions of that entity”.
The anti-hybrid rules can apply to transactions between parties that are unconnected if the transaction is a ‘structured arrangement’. That term covers transactions that give rise to a mismatch outcome where (a) the mismatch outcome is priced into the terms of the arrangement or (b) the arrangement was designed to give rise to a mismatch outcome. The anti-hybrid rules will apply only to taxpayers who share in the value of a tax benefit arising from a structured arrangement.
The anti-hybrid rules are designed to apply only to transactions where a mismatch outcome arises as a result of hybridity and should not apply where a payment is deductible but not taxed in the hands of the recipient as a result of the recipient being an exempt entity or located in a zero-tax jurisdiction. We will issue a more detailed update on the anti-hybrid rules in the coming weeks.
Deductions for Foreign Taxes Restricted
From 1 January 2020 deductions will no longer be available for “any taxes on income” in calculating taxable profits. The Explanatory Memorandum that was issued with the Bill notes that the amendment “is intended to clarify in legislation Revenue’s long-held view with regard to such taxes”. A number of taxpayers who have suffered foreign withholding taxes on income generated abroad are appealing assessments issued by Revenue that seek to disallow deductions for such taxes. The amendment confirms the non-deductibility for withholding taxes on income imposed from 1 January 2020 but will not affect the position for prior years (which will be resolved by the Courts).
The provisions of DAC 6 are implemented under the Bill and the implementation closely tracks the language of the directive. DAC 6 is an EU directive that requires advisers based in EU Member States (or in some cases taxpayers) to report details of certain cross-border transactions to their local tax authority. The information collected by EU tax authorities under the Directive is shared. The reporting obligations commence on 1 July 2020 but can apply to transactions entered into on or after 25 June 2018.
The Bill implements the key aspects of DAC 6. More detailed implementing regulations and guidance are expected in 2020.
Dividend Withholding Tax
The rate of dividend withholding tax will be increased from 20% to 25%. The increase applies from 1 January 2020. The existing exemptions continue to apply and as a result, the increase should be relevant to a limited number of recipients of dividends from Irish companies.
R&D Tax Credits and Outsourced R&D
The Bill provides that the level of expenditure on R&D that is outsourced to universities that can qualify for the R&D tax credit will be increased to 15% of overall expenditure on R&D.
Where expenditure is outsourced, the taxpayer must notify the person to whom the R&D is outsourced that the R&D tax credit is being claimed by the taxpayer (so that the person undertaking the outsourced R&D does not also seek to claim a credit). The Bill requires that notification to be made on or before the date payment is made.
The Bill includes provisions to effect the announced increase in stamp duty from 6% to 7.5%. The increased rate will apply to transfers of non-residential property. It applies to instruments executed on or after 9 October 2019. If a binding agreement was in place before 9 October, the increased rate will not apply provided the instrument of transfer is executed before 1 January 2020 and it includes a certificate confirming that a binding agreement was in place before 9 October 2019.
A new charge on ‘cancellation schemes’ is included in the Bill and applies to scheme orders made in respect of Irish companies on or after 9 October 2019. These transactions involve schemes of arrangement approved by the Irish High Court where an Irish company is acquired by cancelling shares in that company and issuing new shares. The provision imposes a 1% stamp duty charge on transactions for the acquisition of a company which involve a share cancellation. The stamp duty is charged on the consideration received for the cancelled shares and is payable by the person who pays the consideration.
Amendments to Tax Treatment of Securitisation Companies
The tax treatment of Irish securitisation companies (section 110 companies) will be amended under the Bill. The specific anti-avoidance provision that applies to section 110 companies will be amended and it will apply if it is reasonable to consider that one of the main purposes of the arrangement is to avoid tax.
In addition, restrictions on the ability to deduct profit participating interest may apply to interest payments made to certain recipients if the recipient is a person who has ‘significant influence’ over the section 110 company and holds a 20% interest in the shares of the company, or 20% of the principal value of the profit participating notes in issue, or has a right to 20% of the profit participating interest or any dividends paid by the company. Significant influence is defined to mean the “ability to participate in the financial and operating decisions of a company”.
Stock Loan and Repo Transactions
New provisions are included in the Bill to outline the tax treatment of stock loans and repos where the term of the arrangement does not exceed 12 months. The purpose of the rules is to tax the transactions in accordance with their substance rather than their legal form. The provision put on a statutory footing the treatment that Revenue has historically applied to stock loans and repo transactions.
Under the provisions, the transactions are not treated as involving any disposal or acquisition for tax purposes; any income earned by the stock lender for entering the transaction is treated as a return on debt; and manufactured payments are recognised for tax purposes and are deductible and taxable (although deductions cannot exceed the taxable dividend or interest received including any double tax relief that might be available).
If dividend withholding tax is a real economic cost to a stock borrower, a provision for refund is included but it is subject to a series of strict conditions. An anti-avoidance provision is also included to dis-apply the rules where the main purpose of a transaction is to avoid tax.
Irish Real Estate Funds (IREFs)
Significant amendments are made to the tax treatment of IREFs that are debt-funded. Under the changes, additional income is treated as being earned by IREFs if the borrowings exceed a debt cap (which applies if the amount borrowed exceeds 50% of the cost of the real estate) or a financing cost ratio is breached (this is triggered if the IREF profit is less than a quarter of the adjusted borrowing costs).
In addition, if an expense incurred by an IREF is not wholly or exclusively incurred for the purpose of the IREF business, a tax charge will be imposed on that amount. The Bill also includes a tax charge on IREFs in respect of 10%-plus shareholders that are also ‘specified persons’.
A twice yearly filing requirement is included for IREFs. The return filed must include details of the assets held by the IREF, transactions with persons connected with unitholders in the IREF and details of any taxable events arising during that period.
Real Estate Investment Trusts (REITs)
Dividend withholding tax will apply to any distributions derived from the proceeds of a disposal by a REIT. Previously such dividends could be paid free from withholding tax.
If any expense taken into account by a REIT in calculating its aggregate profits was not wholly and exclusively incurred for the purposes of the property rental business, that amount is treated as taxable income of the REIT.
New provisions will require a REIT to distribute or reinvest any proceeds from the disposal of a property within 24 months of disposal. If the proceeds are not distributed or reinvested, they are treated as ‘property income’ of the REIT and 85% of a REIT’s property income must be distributed annually.
Where an entity ceases to be a REIT, a deemed disposal event arises (and the assets held are re-based for CGT purposes). Such deemed disposals will now only apply where the entity was a REIT for at least 15 years. As a result, any REIT ceasing to be a REIT before the end of this 15 year period will now continue to hold its assets at their historic cost.
Additional Tier 1 Capital
The definition of Additional Tier 1 instrument has been extended to include comparable instruments with equivalent characteristics issued by companies other than regulated institutions. This amendment will extend the beneficial tax treatment applicable to Additional Tier 1 instruments to those comparable instruments.
Special Assignee Relief Programme (SARP)
SARP provides relief from income tax on the earnings of employees who are assigned to work in Ireland from abroad where certain conditions are satisfied. The SARP scheme has been extended to the end of 2022 allowing employees arriving in Ireland in 2021 and 2022 the opportunity to avail of SARP relief.
Foreign Earnings Deduction (FED)
The FED is a relief from income tax that is available to employees who are resident in Ireland but spend time working abroad. It has been extended to the end of 2022.
Double Tax Treaties
The Bill includes provisions to ratify the newly negotiated double tax treaty with the Netherlands and the protocol to the double tax treaty with Switzerland.
The Bill will be debated in the Houses of the Oireachtas and it is likely that amendments will be made during that process. The final text is expected to be passed into law before the end of the year.