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Finance Bill 2021
Interest Limitation Rules
As announced on Budget 2022 Day and having been well publicised over the course of the last year, Finance Bill 2021 introduces Part 35D into the Taxes Consolidation Act 1997 to implement the interest limitation rules as required by the EU Anti-Tax Avoidance Directive (“ATAD”). These rules will act to limit corporation tax relief on net interest expenses of companies to 30% of EBITDA (subject to specific group and equity ratio provisions and other exclusions) and will come into effect with respect to accounting periods commencing on or after 1 January 2022.
The following are of particular note to the financial services sector:
- The financial undertaking exemption has not been adopted.
- Interest and amounts economically equivalent to interest is broadly defined and includes, for example, foreign exchange gains and losses on interest, amounts incurred directly in connection with raising finance including guarantee fees,
arrangement fees and commitment fees.
- Companies may operate the interest restriction on a single entity or local group basis with an election in as opposed to out of the interest group as envisaged during public consultation.
- Exceptions include instances where the Irish taxpayers net borrowing costs are less than €3million and where a company is a standalone company (i.e. broadly, a company which has no associated enterprises or permanent establishments).
- There are grandfathering provisions in relation to interest on debt where the terms were agreed on or before 17 June 2016.
Due care and consideration will need to be given to cases where interest
expenses arise to companies whose income consists solely of gains or income
which are not considered to be interest.
In a positive development, provisions to include the finance income element and finance cost element of non-finance lease payments as “interest equivalent “in the hands of a company carrying on a trade of leasing, were introduced. This should be welcomed by the aircraft leasing community.
Finance Bill seeks changes to the definition of “entity” and “associated
enterprises” for the purposes of the anti-hybrid rules introduced with effect
from 1 January 2020.
The stated aim of the changes to the definition of “entity” is to align
it more closely with the ATAD definition. The proposed changes seek to include:
- an association of persons recognised under the laws of the territory in which it is established as having the capacity to perform legal acts.
- any other legal arrangement of whatever nature or form, that owns or manages assets, that is subject to any of the taxes covered by this Part.
These new category inclusions will need to be considered in depth.
In addition, Finance Bill 2020 seeks to expand the definition of “dual inclusion income” in Section 835AB TCA 1997. This particular change is retroactive and is deemed to have come into operation on 1 January 2020. This is a welcome change as there was an anomalous situation where a group headed by a partnership of individuals or simply individuals could fall foul of the anti-hybrid rules even where there was no economic hybridity.
Reverse Anti-Hybrid Rules
In line with previous announcements, Finance Bill 2021 introduces reverse anti-hybrid rules which seek to address tax mismatches that arise where an Irish entity is a reverse hybrid entity. The implementation of these rules had been deferred when introducing the Anti-Hybrid Rules outlined above and it was well publicised that the remaining requirements of the reverse anti-hybrid rules as required under the ATAD would be addressed in Finance Bill 2021 and shall apply to tax periods commencing on or after 1 January 2022.
The rule provides an exemption for Collective Investment Schemes that
are subject to investor-protection regulation, are widely held and hold a
diversified portfolio of assets.
Attribution of profits to a branch
Finance Bill introduces the authorised OECD approach for the attribution
of profits to permanent establishments (“PE”). This was foreshadowed in a consultation process earlier in the year and will be of particular interest to Financial Services Groups who have an Irish branch / PE. It should be noted that the draft law includes significant provisions in relation to the retention by the branch / PE of records for the purposes of Irish tax including records similar to those which would be maintained in a transfer pricing local file. Broadly, the law will apply to large corporates for accounting periods commencing on or after 1 January 2022. However, a Ministerial Order will be required before the requirements extend to small or medium-sized enterprises.
As announced on Budget Day, the Bank Levy is to be extended for a further year to 2022 and Finance Bill 2021 makes provision for same.
Certain Insurance and other levies on financial cards and cheques
A series of changes have been made to the Stamp Duties Consolidation Act
1999 (SDCA 1999) in an effort to streamline how, broadly, stamp duties on
certain insurance policies, financial cards and cheques are collected by the
Revenue Commissioners. The pay and file system for the collection of these stamp duties is to be modernised, replacing the current existing manual pay and file processes.
These changes should be carefully considered by the Insurance and
Banking Sectors as they will require updates to processes and systems to
capture the changes. However, it should also be noted that some of these
changes are subject to a Commencement Order by the Minister.
In addition, Finance Bill 2021 introduces legislation, broadly, to bring
stamp duties on financial cards, cheques, and certain insurance policies within
the scope of the general stamp duties compliance provisions relating to
surcharges on late filing and other administrative matters. These particular changes are due to commence on 1 January 2022.
Although Irish corporate law made provisions for domestic mergers pursuant to the Companies Act 2014, the tax regime had no express provisions confirming the tax treatment. While Finance Act 2017 made a number of changes to Irish tax law provisions in relation to certain mergers, these changes did not address instances where there is a merger by absorption. Finance Bill 2021 now confirms that a parent company shall not be treated as disposing of shares where there is a merger by absorption of the parent company and its 100% subsidiary provided certain conditions are satisfied. This is a welcome confirmation and development for those groups in the Financial Services sector who may be seeking to streamline and consolidate Irish operations by means of merger by absorption.
DAC 6 Powers of Enquiry | Access to AML and other data
It should also be noted that Finance Bill 2021 provides the Revenue
Commissioners with powers of enquiry into compliance by intermediaries and
taxpayers with obligations under DAC6. In particular, the Revenue Commissioners may access the data held by intermediaries / taxpayers where such data was collected for anti-money laundering and terrorist financing reasons.
Finance Bill 2021 introduces a significant amount of changes which will have an impact on companies operating in the financial services industry. Many of the changes are complex and will require in depth analysis in particular the introduction of interest limitation rules, the provisions of which account for more than 10% of the entire Bill. In particular, companies should focus on the impact of the rules which come into effect for accounting periods commencing on or after 1 January 2022 given the proximity to the end of the calendar and financial year for many entities operating in the financial services sector.