Overview of key measures introduced in Finance (No.2) Act 2023

New interest deduction measure for qualifying non-trading group financing companies

A new interest deduction for qualifying finance companies was introduced in Finance (No.2) Act 2023. The new interest deduction applies to non-trading financing companies. Subject to certain conditions and anti-avoidance provisions, a deduction will be available for interest borrowed by a non-trading company from a third-party lender, which is onward-lent to certain 75% subsidiaries provided that the funds are used wholly and exclusively for the purposes of their trades. The new interest deduction is being welcomed as an interim measure aimed at simplifying Ireland’s rules on interest deductibility.

The new measure provides interest deductibility for a “qualifying financing company”, or “QFC” for short, once certain criteria are satisfied.

Who qualifies and what are Qualifying Finance Companies?

A ‘qualifying financing company’ or ‘QFC’ is a company that obtains third-party finance and advances that loan to certain direct 75% subsidiaries, which, in turn, use the funds for a qualifying business purpose that is wholly and exclusively for their trades (working capital purposes) and not for the redemption or subscription for shares or any other payment relating to shares or the capital structure of the company. This is subject to anti-avoidance and detailed conditions.

The relief consists of a Schedule D Case III or Case IV deduction (that is, non-trading) for external interest on the element of the third-party loan that is matched with the relevant loan provided to the subsidiary. For external loans in place on 1 January 2024, these will be matched with any relevant loans existing at that time as if, at or about the time the external loan was borrowed, they were onward-lent as relevant loans to subsidiaries.

Qualifying finance companies (QFCs) can obtain a deduction for interest paid to an external or third-party financier on a loan from that financier where:

• the activities of the QFC relate wholly to the making of the qualifying business loans to certain qualifying subsidiaries in which it holds 75% or more of the share capital (such loans are referred to as relevant loans).

• the external interest paid by the QFC can be matched against interest income received in respect of a relevant loan or loans advanced by the QFC.

subject to strict qualifying criteria and anti-avoidance rules being met.

A qualifying subsidiary of a QFC refers to a company that meets all three of the following conditions:

1. a subsidiary that exists wholly or mainly for the purpose of carrying on any trade or trades.
2. a subsidiary that is tax resident in an EU Member State, an EEA State or a country with which Ireland has concluded a Double Taxation Agreement.
3. in which the QFC directly holds at least 75% of the ordinary share capital of the company.

A ‘relevant loan’ is defined as a loan that must be entered into between the QFC and its subsidiary at an arm’s length price, so any groups considering availing of this new provision should ensure that they are satisfied with their transfer pricing.

In summary, these new rules allow QFCs to claim a Case III or Case IV deduction for third-party interest paid, where the interest is on-lent to a qualifying 75% direct or indirect subsidiary for working capital purposes.

EU information reporting directives (DAC 6 and DAC 7)

DAC 6

The Finance Act contains technical amendments that clarify the powers available to Revenue to make enquiries into the accuracy of a return made, or the failure to make a return, concerning the mandatory disclosure of certain reportable cross-border arrangements (commonly referred to as DAC6 reporting).

Under DAC 6, intermediaries and, in certain cases, impacted taxpayers are required to file returns of information with Irish Revenue regarding reportable cross-border arrangements. The term ‘arrangement’ is broadly defined for this purpose and includes all types of arrangements, transactions, payments, schemes and structures, whether or not legally enforceable. An arrangement could involve more than one step, for example, the various steps around entering into a loan agreement. A ‘cross-border arrangement’ is one concerning an EU Member State and any other jurisdiction where at least one of five conditions are met.

Conditions that may be regarded as reportable cross-border arrangements include situations where:

• One or more of the participants in the arrangement is simultaneously resident for tax purposes.
• One or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that other jurisdiction and the arrangement forms part of the whole of the business of that permanent establishment.

DAC 7

In order to meet its obligations under the EU Directive on Administrative Co-operation 2021/514, referred to as DAC 7, Finance Act 2022 introduced EU-wide automatic reporting obligations on digital platform operators in respect of certain sales made via their platform under DAC 7. DAC 7 also introduced a common legal basis by which EU Member States are obliged to facilitate other Member States in conducting joint tax audits.

Finance Act 2023 includes technical amendments to the FA 2022 legislation and also introduced the legal framework and procedural arrangements for the Irish Revenue to conduct joint tax audits with the competent authorities of other EU Member States. A person subject to a joint audit should have the same rights and obligations as currently applies to a taxpayer subject to an audit by the Irish Revenue only. With effect from 1 January 2024, Irish Revenue can facilitate joint audits by other EU Member States.

Outbound payment's defensive measures

Defensive measures on outbound payments are to come into effect on 1 April 2024 to prevent double non-taxation outcomes.

Finance (No.2) Act 2023 introduced defensive measures to certain outbound payments of interest, royalties and distributions paid to associated entities in specific territories to prevent double non-taxation. Where the measures apply, existing exemptions from income tax for a non-resident entity receiving a distribution and from the requirement to deduct withholding tax do not apply.

The new measures apply from 1 April 2024, unless arrangements relating to payments were in place on or before 19 October 2023, in which case the measures apply from 1 January 2025.

The payment must be included in the company’s income tax or corporation tax return for the year to include the following details:

• Amount of payment/distribution.
• Amount of tax withheld.
• Territory where the entity/permanent establishment is resident.

What outbound payments are in scope?

The new measures apply to associated entities who are resident in the following specified territories:

• a zero-tax country which generally subjects entities to a tax rate of zero on income, profits or gains.
• in a country which is on the EU list of non-cooperative jurisdictions for tax, to include American Samoa, Anguilla, Antigua and Barbuda, The Bahamas, Belize, Fiji, Guam, Palau, Panama, Russian Federation, Samoa, Seychelles, Trinidad and Tobago, Turks and Caicos Islands, US Virgin Islands, and Vanuatu.

Entities are associated if one entity, directly or indirectly, possesses more than 50% of the issued share capital of the other entity, is entitled to exercise more than 50% of the voting power, is entitled to more than 50% of the profits available for distribution, or a third entity holds more than 50% of the issued share capital, voting power or entitlement to profits of two other entities.

Two entities are also associated if one entity has a definite influence on the management of the other entity.

Excluded payments

An excluded payment that should fall outside the scope of the new withholding tax measures includes cases where the payment should be within the charge to a supplemental tax, being either a Pillar Two top-up tax or a CFC charge, a foreign tax rate that is greater than 0%; or a domestic tax other than the new withholding tax.

Payments made to pension funds, government bodies, or other tax-exempt entities should also be excluded from the scope.

Interest

Irish tax resident companies are generally required to deduct withholding tax at 20% from payments of yearly interest. This general requirement is subject to a range of exemptions, though, including where the interest is paid in the course of a trade or business carried on in Ireland to a company that is resident either in another EU Member State or in a tax treaty country, provided the country in which the recipient of the interest is resident imposes a tax on interest earned from outside that jurisdiction.

Where the recipient of a payment of interest, both yearly and non-yearly, is resident in a specified territory or is a permanent establishment of an associated entity in a specified territory, the defensive measures for outbound payments of interest will dis-apply the existing Irish domestic interest withholding tax exemptions.

For example, non-resident entities that recieve Irish source interest will no longer be exempt from Irish income tax. Also, the payor company will be required to deduct a withholding tax of 20% on the payment of the interest and pay this over to Revenue. The payee company will be given credit for tax withheld when filing their Irish tax return.

The new measures will apply equally to ‘short’ interest payments, defined as interest payments on loans with a term of less than 12 months, where the interest is paid to an entity in a specified territory so that short interest will be brought within the scope of Irish withholding tax.

The defensive measures will not apply to any portion of an interest payment:

(i).   where the recipient entity in the specified territory pays a corresponding amount of interest to another entity in an accounting period that commenced within 12 months of the end of the accounting period in which it was received.

(ii).  The corresponding amount would have been an excluded payment if it had been made directly to that entity (for example, the payment would have been subject to tax).

(iii). The payments were made for bona fide commercial purposes.

Royalties

Ireland currently imposes a withholding tax at 20% on payments of patent royalties and other annual payments, subject to the availability of relief where the payments are made to recipients resident in an EU or tax treaty jurisdictions once certain conditions are met.

The new legislation will disapply the existing withholding tax reliefs and expand the categories of royalty payments that are subject to Irish withholding tax where the recipient of a royalty payment is resident in a specified territory or is a permanent establishment of an associated entity in a specified territory, to the extent that the royalty payment is not an excluded payment.

The new withholding tax provisions should not apply if the payment is not deductible for Irish corporation tax purposes.

The defensive measures deem the payment to be profits arising to the non-resident entity from property in Ireland and a charge to income tax arises.

The exclusions outlined in relation to interest should apply equally to royalties.

Distributions

Generally, where an Irish tax resident company pays a distribution (generally, a dividend but not necessarily a cash dividend) to a company or individual resident in a tax treaty jurisdiction then subject to the necessary certification being in place and that the recipient of the dividend is beneficially entitled to it, there is an exemption from the requirement to withhold dividend withholding tax at 25% on paying the dividend.

Where an Irish tax resident company pays a distribution to an associated entity that is tax resident in a specified territory (or a permanent establishment of an associated entity which is situated in a specified territory), existing domestic reliefs from Irish dividend withholding tax at 25% will be disapplied.

Furthermore, a company resident in a specified territory, or is a permanent establishment of an associated entity in a specified territory, receives a distribution paid out of income, profits or gains which have not been charged to tax, income tax exemptions are disapplied.

The exemptions disapplied include distributions paid out of profits from greyhound & stallion fees or profits from woodlands and mining. Dividend Withholding Tax must also be deducted from these distributions.

In addition to the exclusions noted above from the Outbound Payments provisions generally, the provisions should not apply to distributions made out of foreign branch profits that are subject to foreign taxation.

Other points of note

As a relationship of more than 50% is required, investments in joint ventures may fall outside the scope of the new measures. Transactions with third parties should not be impacted.

Where a company makes an interest, royalty or distribution payment to an associated entity that is tax resident in a specified territory or a permanent establishment of an associated entity situated in a specified territory, the company will be required to disclose the following details in its Irish corporation tax return:

      i.        The amount of the payment or distribution.

     ii.        The amount of tax withheld.

    iii.        The specified territory where the recipient of the payment is tax resident or situated.

Changes to the Employment Investment Incentive Scheme

In respect of the Employment Investment Incentive Scheme (EIIS), Finance (No.2) Act 2023 introduced several necessary adjustments to ensure compliance with the EU rules referred to as General Block Exemption Regulation or “GBER”, in order to conform with the recently revised EU State aid legislation.

One of the most significant modifications to the Act concerns the tax relief rate applicable on the qualifying investment. Previously, the income tax relief was granted at the marginal rate (40%) under all events. However, starting on 1 January 2024, differing rates of relief will be applied depending on the eligibility criteria met by the investee company and whether the investments are made directly into the company (20%, 35%, or 50% based on eligibility criteria) or indirectly via a financial intermediary (30% in all instances).

The definition of ‘eligible shares’ previously included shares with a preferred right to dividends or assets on a winding up. The definition has been revised to specify that eligible investments now only include full-risk ordinary shares.

In addition, the Finance Act enacted the following amendments effective from 1 January 2024:

• The minimum investment holding period required to obtain the EII relief has been standardised to four years in all cases.
• The maximum investment an investor can claim relief for in any tax year within the four years has increased from €250,000 to €500,000.
• The lifetime limit a RICT Group can raise through the issue of eligible shares under the EII Scheme is now €16.5m (increased from €15m), and the maximum the group can raise during a 12-month period is €5.5m (increased from €5m).
• For qualifying companies seeking ‘expansion risk finance investment’, the investment threshold has been reduced from 50% to 30% of their average annual turnover, provided the investment aims to substantially enhance the company's environmental performance or support other environmentally sustainable initiatives. Furthermore, the requirement with respect to expansion risk finance investment that the funds raised be used to expand into new products or new geographic markets has been broadened so that expansion into ‘new economic activities’ is now sufficient.
• For start-up companies aiming to secure funding during their early phases, the eligibility criteria have been expanded under the Act. Previously, a company needed to raise capital before commencing operations or within seven years of its first commercial transaction. Now, companies raising capital within 10 years of their incorporation date can also meet the requirements. Additionally, the Act includes guidelines for interpreting the seven and 10-year thresholds in cases where companies are acquired or formed through mergers.
• For those companies that raise initial risk finance, their business plans must now explicitly include provisions for follow-on risk finance investment in eligible undertakings, rather than merely anticipating it as currently required.
• With respect to companies that have not commenced operations, the investment relief will be calculated at 125% of the subscribed amount.

Relief for certain income from leasing of farmland

Finance (No.2) Act 2023 introduced amendments to relief for certain income from leasing of farmland. These amendments were introduced in order to ensure that the relief does not become “immediately available” to anyone who buys land.

The measures were introduced to end a practice which “had an impact on farmers in pushing up land prices for genuine active farmers”.

Minister McGrath has told the Dáil that the “requirement to own the farmland for seven years prior to letting it out under a ‘qualifying lease’ will not apply to individuals who have acquired the land other than by way of purchase, for example, by inheritance or gift”.

“These individuals will still be in a position to make a claim without a seven-year holding period once all the other conditions for claiming the relief are met,” the minister stated.

He also said that it is proposed “to introduce a provision which will override the application of the seven-year holding rule in the specific circumstance involving the death of a spouse”.

Summary of Finance (No. 2) Act 2023 amendments re leasing of farmland

• Qualifying lessor - For contracts entered into on or after 1 January 2024, an individual must have owned the farmland concerned for at least seven years before they are eligible for the income tax relief.

• The land must have been purchased for market value at the time of acquisition.

• Where a taxpayer has entered into and signed a contract to purchase farmland in December 2023, but the sale is completed during or after) January 2024, Revenue has confirmed that the seven-year holding requirement will not apply in respect of that purchase.

How the relief operates

S664 TCA 1997 provides for an income tax exemption for certain income arising from the leasing of farmland.

Subject to an upper limit, a deduction in determining total income for income tax purposes will be available to individuals where the following conditions are met:

There must be a qualifying lease – a lease of farmland which:

• is in writing or evidenced in writing.
• is for a definite term of 5 years or more.
• is made on an arm’s length basis between one or more qualifying lessors and one or more qualifying lessees.

The individual must be a qualifying lessee:

• A person who is not connected with the qualifying lessor.
• Uses the leased farmland for the purpose of a trade of farming.

A qualifying lessor is an individual who has not after 30 January 1985 leased the farmland from a person connected to them on terms that are not considered arm’s length.

For qualifying leases taken out on or after 1 January 2015, the specified amount is:

• €40,000 in the case of a qualifying lease or leases where the leases/leases are for a definite period of 15 years or more.
• €30,000 in the case of a qualifying lease or leases where the leases/leases are for a definite period of 10 or more years but less than 15 years.
• €22,500 in the case of a qualifying lease or leases where the leases/leases are for a definite period of 7 or more years but less than 10 years.
• €18,000 in any other case.

Where a lease period covers part of a full year, the exemption limit is apportioned accordingly on a time basis.

Where a husband and wife or civil partners are jointly assessed (section 1017/1031C) or separately assessed (section 1023/1031H) and both are involved in qualifying leasing, each is entitled to a separate exemption. This is arrived at as if they were not married or in a civil partnership. Unused balances of the relief are not, therefore, transferable from one spouse or civil partner to the other.

If you have any questions in relation to the above, or if you would like to discuss the above topics further, please contact a member of the Mazars corporate tax team below:

March 2024