Changes to Ireland's withholding tax regime, introduced in Finance (No. 2) Act 2023, began to apply from 1 April 2024. The changes apply to deny exclusions from Irish withholding tax on certain payments of interest, royalties and distributions. The rules apply to payments made on or after 1 April 2024. However if the payment is made in respect of arrangements that were in place on or before 19 October 2023, the rules will only apply from 1 January 2025.
The aim of the new rules is to prevent double non-taxation. Under the changes, exclusions from withholding tax will be denied on payments of interest, royalties and, in some cases, distributions where those payments have an Irish source and are made to associated entities that are tax resident in certain targeted jurisdictions. Those targeted jurisdictions are:
- zero or no tax jurisdictions; and
- jurisdictions included on the EU list of non-cooperative tax jurisdictions for tax purposes (the "EU List").[1]
The rules were prompted by the EU initiative in respect of non-cooperative jurisdictions for tax purposes. Although the application of the rules will require consideration in a number of cases, the rules should only operate to deny withholding tax exemptions in cases where double non-taxation would actually arise.
The Irish Revenue Commissioners ("Revenue") recently issued guidance on the rules (the "Guidance") which includes some helpful clarification.
Associated Entities
The rules only apply to payments to associated entities. Entities will be associated for the purposes of the rules if one, directly or indirectly, holds more than 50% of the other (whether through shares or other ownership rights, voting rights, rights to dividends or assets on winding-up) or if another entity holds more than 50% of the two entities.
In addition, entities can be associated if one has definite influence in the management of the other. This is a new concept in Irish tax law and will arise when one entity has the ability to participate:
- on the board of directors (or equivalent body) of the other;
- in the financial and operating policy decisions of the other,
where that ability causes or could cause the affairs of the other entity to be conducted in accordance with the wishes of the influencing entity.
In the Guidance, Revenue confirm that an entity will have definite influence in the management of another where it has the capability to exert influence on the affairs of the other entity so that those affairs are conducted in accordance with its wishes. The definite influence threshold will be met whether or not that capability to exert influence held is actually exerted.
Revenue have included an example in the Guidance which demonstrates that an ability to appoint up to 50% of a board of directors does not in itself give rise to definite influence in the management of that entity.
Excluded Payments
Payments of interest, royalties and distributions are excluded from the rules (and can be paid free from withholding tax where standard exemptions apply) when it is reasonable to consider that double non-taxation does not arise. This will be the case when it is reasonable to consider that either (i) the payment will be taxed, or (ii) the payment is made out of income that has been subject to non-Irish tax and was non-deductible in calculating that foreign tax. In addition, certain payments to or from pension funds, government entities or other tax exempt entities that are not resident in the targeted jurisdictions can be excluded.
(i) The payment is taxed
A payment to an associated entity in a zero or no tax jurisdiction or a jurisdiction that is on the EU List will be an excluded payment if it is reasonable to consider that an amount arising from the payment is within the charge to tax. The rules adopt a comprehensive approach to taxation for this purpose and will treat a payment as being taxed if it is subject to Irish tax or foreign tax including a controlled foreign companies charge, the US global intangible low taxed income tax ("GILTI"), an income inclusion rule or an undertaxed profits rule based on Pillar Two, a domestic top-up tax based on Pillar Two or any other similar tax.
By way of example, Revenue have provided a specific confirmation in the Guidance in respect of payments made by an Irish company to another group company, both of which are treated as transparent for US tax purposes (with the result that the payment is disregarded for US tax purposes and is not within the charge to tax in the US). The Guidance confirms that the payment will be excluded from the rules (and can be paid free from withholding tax) provided the taxpayer can demonstrate that (i) the payment is made out of an amount of income, profits or gains that is included in the GILTI calculation for the purposes of the group’s US taxable income, and (ii) no account is taken of the payment of interest from the Irish company to the other group company (or any amount in respect of that payment) for the purposes of the GILTI calculation.
The Guidance further confirms that where a payment (including a distribution) would be within the charge to a Pillar Two top-up tax or a similar tax but for the fact that a Pillar Two safe harbour applies, the payment will still be considered to be within the charge to tax and can be treated as an excluded payment.
(ii) The payment is made out of foreign taxed income and is non-deductible
If the payment is made out of income, profits or gains that are within the charge to foreign tax and no account was taken of that payment (i.e., it was not deducted) in calculating the foreign tax, the payment will be excluded. For this purpose foreign tax means a tax chargeable on profits or gains under the laws of a foreign jurisdiction and which is similar to Irish income tax, corporation tax (including controlled foreign company charges) or capital gains tax.
In addition (and as discussed further below), the rules do not apply to distributions that are made out of income that has been charged to Irish tax (which will typically be the case for distributions made by Irish companies).
(iii) The payment is made to or by a tax exempt entity not resident in a targeted jurisdiction
The rules are not intended to impact payments made to or by tax exempt entities such as pension funds or government entities that are not resident in a targeted jurisdiction. As such, if a payment would be a payment that satisfies either (i) or (ii) but for the fact that the entity making or receiving the payment has a special tax exempt status (i.e. is a pension fund, government entity or other tax exempt entity) and is not resident in a targeted jurisdiction, then the payment will be excluded.
Impact on Exclusions from Withholding Tax on Interest
Irish sourced interest payments are generally subject to withholding tax at 20%. However, exclusions are available in a number of cases, including when the recipient is tax resident in a treaty partner jurisdiction or an EU Member State, when the interest is paid on a security quoted on a recognised stock exchange (the 'quoted Eurobond exemption'), or when interest is paid on a debt instrument that matures within two years (the 'commercial paper exemption').
Exclusions from withholding tax on interest will be disapplied under the outbound payment rules if the payment is made to an associated entity that is resident in a targeted jurisdiction or to a permanent establishment of an associated entity that is situated in a targeted jurisdiction (unless the payment is an excluded payment).
In recognition of the fact that taxpayers that pay interest on listed securities or commercial paper typically won't know who the recipient of the interest is, the Guidance helpfully provides that the quoted Eurobond exemption and the commercial paper exemption can continue to apply where it is reasonable to consider that the entity paying the interest is not, and should not be, aware that any part of the interest is paid to an associated entity.
Impact on Exclusions from Withholding Tax on Royalties
Irish sourced royalty payments in respect of patents are subject to withholding tax at 20%. However, exclusions are available in a number of cases, including when the recipient is tax resident in a treaty partner jurisdiction or an EU Member State.
Exclusions from withholding tax on royalties will be disapplied under the rules if the payment is made to an associated entity that is resident in a targeted jurisdiction or to a permanent establishment of an associated entity that is situated in a targeted jurisdiction (unless the payment is an excluded payment).
Impact on Exclusions from Dividend Withholding Tax
Distributions made by Irish resident companies are generally subject to withholding tax at 25%. However, exclusions are available in a number of cases including where distributions are made to persons resident in a treaty partner jurisdiction or an EU Member State, distributions made to non-Irish resident companies that are controlled by persons resident in a treaty partner jurisdiction or an EU Member State, or distributions made to non-Irish resident companies that are subsidiaries of listed entities.
Exclusions from withholding tax on distributions will be disapplied under the rules if:
- the distribution is made to an associated entity that is resident in a targeted jurisdiction or to a permanent establishment of an associated entity that is situated in a targeted jurisdiction;
- the distribution is not an excluded payment; and
- the distribution is made out of income that has not been charged to tax.
The conditions are cumulative. Accordingly, the rules can only apply to distributions that are made out of untaxed income. Tax, for this purpose, is again defined broadly and includes Irish tax, foreign tax, controlled foreign company charges, Pillar Two taxes and similar taxes. It will typically be the case that distributions made by Irish companies will be paid out of taxed income. The disapplication of the withholding tax exclusion to distributions should therefore only apply in limited circumstances, for example if the distribution is made out of reserves generated by a capital contribution that have not been subject to tax.
Application to Irish plcs
The Guidance includes a practical confirmation with regard to dividends paid by Irish listed companies. Shares in Irish listed companies are generally widely held and their shareholders tend not be 'associated' with the Irish company for the purpose of these rules. However, Irish listed companies often do not know the identity if their shareholders and dividends are typically paid through intermediaries that are recognised by Revenue as 'qualifying intermediaries'. These qualifying intermediaries can receive and onward pay the dividends free from withholding tax if they confirm that the underlying investor is permitted to receive the dividend free from withholding tax. The Guidance confirms that such qualifying intermediaries may rely on standard dividend withholding tax declarations as usual unless it would be reasonable to consider that the person beneficially entitled to the dividend may be an associated entity of the listed company.
New Reporting Obligations
Finally, the provisions require any company that makes of payment of interest or a royalty or that makes a distribution to an associated entity that is resident in a targeted jurisdiction or to a permanent establishment of an associated entity that is situated in a targeted jurisdiction file an annual return with Revenue detailing the amount of the payments, the amount of tax withheld and the jurisdiction where the recipient was resident.
Concluding Remarks
As noted above, the rules are intended to prevent double non-taxation and although they should be considered when exemptions from Irish withholding tax are available, their application has been limited so that they should only operate to deny withholding tax exemptions in cases that actually result in double non-taxation.
Should you wish to discuss the application of the rules to your transaction or organisation, please speak to any of our Tax Partners or to your usual Matheson contact.
[1] On 20 February 2024, the Council of the European Union adopted the following list of non-cooperative jurisdictions for tax purposes: American Samoa, Anguilla, Antigua and Barbuda, Fiji, Gua, Palau, Panama, Russia, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu