On 7 July 2023, the Department of Finance published a Feedback Statement on proposed new legislation to be introduced later this year applying to outbound payments to prevent double non-taxation. The new proposed measures aim to prevent double non-taxation applying to outbound payments to jurisdictions on the EU list of non-cooperative jurisdictions, no-tax and zero-tax jurisdictions with effect from 01 January 2024.
To summarise the proposed new legislative measures, it is anticipated that the measures would apply to outbound interest, royalties and dividends paid to entities located in a specified territory. The provisions apply to payments of interest, royalties or dividends / distributions between "associated entities". For this purpose, an Irish company will be associated with an entity where one holds 50% of the shares, votes or economic interests in the other, or where a third entity holds such rights in respect of both entities.
Where an interest, royalty or dividend payment made by an Irish entity is subject to these new outbound payment rules, the existing withholding tax exemptions provided under Irish tax legislation will no longer be available. For instance, Ireland currently has an interest withholding tax rate of 20% but the Irish tax legislation includes various exemptions from this withholding tax such as an exemption for listed debt (Quoted Eurobonds) and wholesale debt instruments. The proposed legislation would deny these exemptions for interest payments to associated entities in specified territories which could have a serious impact on entities in Ireland, in particular securitisation companies.
The consultation and feedback process for the proposed legislation ran until 8 August 2023.
Some of the primary concerns noted in respect of the proposed legislation include the treatment of “tax transparent” entities under the proposed legislation. Currently where the foreign entity is a partnership in relevant jurisdiction, a payment to the partnership could fall within the scope of this rules. This is notwithstanding that the payment may ultimately be taxed on the investors/partners in the partnership (or the investors/partners would not be an associated entity if they had invested directly). Similarly, for corporate entities which have been “checked open” for US tax purposes, the payment should not be viewed as paid to a zero-tax territory in circumstances where double non-taxation does not arise on the look through.
Another concern is around the fact that dividends have been included in the proposed legislation. The proposed legislation is being implemented to prevent double non-taxation on outbound payments. There is an argument to be made that dividends should be outside the scope of this legislation. As dividends are not tax deductible and are paid out of already taxed profits, double non-taxation should not arise in respect of dividend payments made by Irish entities.
It is likely that we should get further clarity on the proposed legislation when Finance Bill (No.2) 2023 is published and hopefully the updated proposed legislation will provide clarity on the above-mentioned concerns and other concerns noted in the various responses to the feedback statement as it is important that the proposed measures do not go beyond what is required to prevent double non-taxation.
Contributor: Lee Kavanagh, Assistant Manager, Financial Services Tax, BDO
To summarise the proposed new legislative measures, it is anticipated that the measures would apply to outbound interest, royalties and dividends paid to entities located in a specified territory. The provisions apply to payments of interest, royalties or dividends / distributions between "associated entities". For this purpose, an Irish company will be associated with an entity where one holds 50% of the shares, votes or economic interests in the other, or where a third entity holds such rights in respect of both entities.
Where an interest, royalty or dividend payment made by an Irish entity is subject to these new outbound payment rules, the existing withholding tax exemptions provided under Irish tax legislation will no longer be available. For instance, Ireland currently has an interest withholding tax rate of 20% but the Irish tax legislation includes various exemptions from this withholding tax such as an exemption for listed debt (Quoted Eurobonds) and wholesale debt instruments. The proposed legislation would deny these exemptions for interest payments to associated entities in specified territories which could have a serious impact on entities in Ireland, in particular securitisation companies.
The consultation and feedback process for the proposed legislation ran until 8 August 2023.
Some of the primary concerns noted in respect of the proposed legislation include the treatment of “tax transparent” entities under the proposed legislation. Currently where the foreign entity is a partnership in relevant jurisdiction, a payment to the partnership could fall within the scope of this rules. This is notwithstanding that the payment may ultimately be taxed on the investors/partners in the partnership (or the investors/partners would not be an associated entity if they had invested directly). Similarly, for corporate entities which have been “checked open” for US tax purposes, the payment should not be viewed as paid to a zero-tax territory in circumstances where double non-taxation does not arise on the look through.
Another concern is around the fact that dividends have been included in the proposed legislation. The proposed legislation is being implemented to prevent double non-taxation on outbound payments. There is an argument to be made that dividends should be outside the scope of this legislation. As dividends are not tax deductible and are paid out of already taxed profits, double non-taxation should not arise in respect of dividend payments made by Irish entities.
It is likely that we should get further clarity on the proposed legislation when Finance Bill (No.2) 2023 is published and hopefully the updated proposed legislation will provide clarity on the above-mentioned concerns and other concerns noted in the various responses to the feedback statement as it is important that the proposed measures do not go beyond what is required to prevent double non-taxation.
Contributor: Lee Kavanagh, Assistant Manager, Financial Services Tax, BDO