Feedback statement on foreign dividend participation exemption

This article looks at the current treatment of foreign dividends received by Irish financial services companies and some key features of the Strawman Proposal.

Current treatment

Ireland currently operates within a worldwide system of taxation which considers both domestic and foreign profits with a credit available for foreign taxes. The current treatment of foreign dividends is dependent on whether the dividend is considered a trading receipt or non-trading receipt in the hands of the recipient. This has led to a complex system which many taxpayers struggle to understand and is out of line with most of our EU and OECD counterparts who operate some type of Participation Exemption for dividends as a feature of their tax code.

Trading

Irish financial services firms may receive dividends from both trading and non-trading activities. Dividends from trading activities sourced outside Ireland may be exempt under section 21B TCA 1997 or taxable at 12.5%. A credit may not be available for dividend withholding or underlying taxes suffered.

Section 21B TCA 1997 provides for an exemption from Irish corporation tax on certain foreign source portfolio dividends. For the exemption to apply, the following conditions must be met:

• The Irish recipient company (together with any associated parties) must not hold, directly or indirectly, more than 5% of the share capital or voting right of the dividend paying company.
• The dividend income must be classified as a trading receipt in the hands of the Irish recipient company.
• The dividend-paying company must be resident in the EU or a jurisdiction with which Ireland has a Double Taxation Agreement (DTA jurisdiction) or its shares (or those of its 75% parent company) must be listed on a recognised stock exchange.

Recipient companies typically refrain from claiming the exemption if it would lead to violations of the “bond-washing” provisions contained in Part 28, Chapter 1, TCA 1997.

Where dividends do not qualify for the Portfolio Dividend Exemption or it is not claimed, the dividend is taxable at 12.5% as part of the ordinary trading profits of the Irish recipient company .

Non-trading

Where an Irish financial services company receives non-trading dividends, they may be taxable at 12.5% or 25%. A credit may be available for dividend withholding and/or underlying foreign taxes.

The 12.5% rate is available for dividends paid out of trading profits of a 5% subsidiary resident in an EU or DTA jurisdiction or the shares of the dividend paying company (or its 75% parent company) must be listed on a recognised stock exchange. Otherwise, the dividend is taxable at the higher rate of 25%.

A foreign tax credit is generally available for any dividend withholding taxes suffered. In addition, a credit for underlying foreign tax paid by the dividend-paying company may be available where the dividend paying company is resident in an EU or EEA jurisdiction. Pooling of unused foreign tax credits is also available in certain instances.

Strawman Proposal

The Strawman Proposal, if enacted, would be a welcome addition to the Irish tax system, bringing it into line with many of our EU and OECD counterparts. The proposed optional nature of the exemption is also welcomed as it ensures that certain taxpayers will not be disadvantaged by its implementation.

Some of the key features of the Strawman Proposal which will be of interest to financial services companies include:

• It is proposed that the Portfolio Dividend Exemption will remain untouched
• It is proposed that the relief will work as an exemption from corporation tax where the Irish recipient company elects to opt into the regime and the qualifying conditions are met
• It is proposed that the election will be subject to a minimum three-year opt-in period
• It is proposed that in order to qualify, the recipient must control at least 5% of the dividend paying company and the dividend paying company must be resident in an EU or DTA jurisdiction
• Qualification should not be restricted to dividends derived from trading profits
• Where the exemption is availed of, recipient companies should not be entitled to a credit for any foreign taxes paid

The deadline for making submissions on the FS is Wednesday, 8 May 2024. The Participation Exemption is due to be included in Finance Bill 2024 and take effect from 1 January 2025.

If you would like to discuss how the implementation of the Strawman Proposal would impact your company, please reach out to a member of our team who would be happy to assist.