Finance Act 2024

Introduction

The Finance Act 2024 (“the Act”) introduced a participation exemption (“Participation Exemption”) regime into the Irish tax landscape, providing for in-scope foreign dividends received by Irish companies on or after 1 January 2025 to be exempted from corporation tax (“CT”) within the jurisdiction.

The much-anticipated implementation of the Participation Exemption aligns Ireland with international standards and enhances its competitive holding company regime on the global stage. The new measure represents a commitment to simplifying Ireland’s tax obligations, bolstering Ireland’s attractiveness as a destination for international business and foreign investment.

Traditional Regime and Participation Exemption Application

The Participation Exemption is optional and available upon election into the regime for the relevant accounting period. Accordingly, the newly introduced framework complements the traditional taxation regime applicable to dividends received by Irish companies from non-resident companies.

Prior to the Act, Ireland operated a ‘tax and credit’ approach whereby foreign dividend income received by an Irish company was taxable as Case III income and thus subject, on first principles, to the higher 25% rate of CT. However, under this ‘tax and credit’ approach, relief was potentially available to reduce or eliminate the tax payable on foreign dividend payments received which were paid out of income taxed in the payee’s home jurisdiction.

As election into the Participation Exemption is required on a period-by-period basis, if the election is made, all income receipts which meet the qualifying criteria will be treated as exempt, while all income receipts that do not meet the criteria will continue to be taxed under the traditional ‘tax and credit’ regime.

Where election is not made, all dividend income received will continue to be taxed as per the traditional ‘tax and credit’ approach. As such, the traditional taxation structure within Ireland remains of relevance, with the Participation Exemption merely working in tandem rather than replacing it.

Qualifying for Participation Exemption

The availability of the Participation Exemption to exempt foreign dividend income received by Irish companies from CT is contingent upon the satisfaction of criteria established by the Act. To qualify for the Participation Exemption, a ‘relevant distribution’ must be made, wherein a ‘relevant parent company’ must have a ‘relevant participation’ in a ‘relevant subsidiary.’ In such circumstances, the ‘relevant parent company’ may elect into the regime for the accounting period in which it received the ‘relevant distribution’. The qualifying criteria as set out by the Act are as follows:

Relevant Parent Company

A ‘relevant parent company’ is a company that holds a qualifying participation in the ‘relevant subsidiary’ and is:

• resident in Ireland or
• resident for the purposes of foreign tax, equivalent to Irish CT, in a ‘relevant territory’ and not generally exempt from foreign tax. A ‘relevant territory’ is a European Economic Area State, other than Ireland, or a territory with which Ireland has a double taxation agreement, provided the territory is not a ‘listed territory’ within Annex I of the European Union list of non-cooperative tax jurisdictions.

The ‘relevant parent company’ must directly or indirectly own the ordinary share capital and be beneficially entitled to at least 5% of the ordinary share capital, at least 5% of the profits available for distribution and at least 5% of the assets available for distribution on a winding-up of the ‘relevant subsidiary,’ the payer of the dividend. For the purposes of the Participation Exemption, an indirect holding through an intermediary company resident in a ‘relevant territory’ may be sufficient. However, holdings held directly or indirectly via non-relevant territory entities or shareholdings are excluded from the calculation as distributions from such holdings are treated as trading receipts.

The Act further provides that the ‘relevant parent company’ must hold the qualifying participation in the ‘relevant subsidiary’ for an uninterrupted period of not less than 12 months and being the period during which the ‘relevant distribution’ is made.

Relevant Subsidiary

The ‘relevant distribution’ may only be made by a ‘relevant subsidiary’, which must satisfy criteria under the Act to qualify for the Participation Exemption. A ‘relevant subsidiary’ must:

• be a resident of a ‘relevant territory’ for foreign tax purposes, which imposes a tax upon the subsidiary’s income, profits and gains that generally corresponds to Irish CT and is imposed at a nominal rate greater than zero percent. Further, the subsidiary may not be generally exempt from foreign tax in the ‘relevant territory.’
• be resident both at the time of paying the ‘relevant distribution’ and from either the time of incorporation up to date of payment or for a five-year period up to that date, whichever is the shorter (known as the ‘relevant period’).
• during the ‘relevant period,’ the subsidiary must not have acquired significant assets or businesses from non-relevant territory companies, nor have been formed through a merger involving such companies.

Where any of the criteria are not met, the parent company will be unable to claim the Participation Exemption in respect of any dividends paid by the subsidiary until five years have elapsed from the date that the relevant criteria were not met.

Relevant Distribution

To qualify for the Participation Exemption, a ‘relevant distribution’ must be made by the ‘relevant subsidiary.’ A ‘relevant distribution’ is a dividend paid, or other distribution made in respect of the share capital, either “out of profits” or “out of assets,” of the ‘relevant subsidiary,’ constituting income in the hands of the recipient which would otherwise be taxable as Case III income.

The ‘relevant distribution’ must not be deductible for tax purposes in any other jurisdiction, be interest or interest equivalent, other income from a debt claim providing rights to participate in a company’s profits, nor may the ‘relevant distribution’ be one made on a winding up. However, distribution upon winding up may fall under Ireland’s participation exemption for capital gains.

As constituent elements of the Participation Exemption, clarification of the terms “profits” and “out of assets” is necessitated.

• “Profits” as adopted by Section 21B Taxes Consolidation Act 1997 (“TCA”) refers to “the amount of profits, after taxation, as shown” in the profit and loss account or income statement of the company.
• Where it is not possible to trace a dividend as being paid out of “profits,” the ‘relevant subsidiary’ may identify the ‘relevant distribution’ as having have been paid “out of assets.” In circumstances where sufficient reserves are created after a capital reduction by the ‘relevant subsidiary,’ a dividend may be made “out of assets” rather than “out of profits.” Equally, the ‘relevant subsidiary’ may not be required to have reserves to make the distribution under local corporate law or may be permitted to make a distribution from a share premium account.
• Further, where the distribution is made “out of assets” of the ‘relevant subsidiary,’ the Participation Exemption is applicable only if any gain on the disposal of the shares held by the ‘relevant parent company’ would not be a chargeable gain if the ‘relevant parent company’ dispose of them on the date the distribution is made.

Exclusions

The Participation Exemption will not be applicable to distributions made to;

• assurance companies where the distribution is taxed under the special provisions of the TCA;
• collective investment undertakings within the meaning of the TCA; or
• companies qualifying under Section 110 of the TCA.

The Act explicitly excludes certain distributions from the meaning of ‘relevant distribution’. The exclusion is applicable to:

• a distribution that has been, or may be, deducted for tax purposes in any territory outside Ireland,
• a distribution made on winding up,
• any interest or other income from debt with profit participation rights,
• any amount considered to be interest equivalent within the meaning of Section 835AY of the TCA, or
• any dividend paid or distributions made by an offshore fund.

Further, the Participation Exemption will not apply to arrangements specifically put in place primarily to obtain a tax advantage, as the arrangements must be put in place for genuine and valid commercial reasons.

How to Claim

To avail of the new regime, the recipient ‘relevant parent company’ must elect to make a claim within its CT return for the accounting period in which the ‘relevant distribution’ is made, and the election will relate to all relevant distributions in that accounting period.

Commentary

The Participation Exemption introduced by the Act represents an improved and streamlined framework on the pre-existing relief for foreign dividend payments to Irish companies under Schedule 24, Section 9I of the TCA by removing the requirement to consider the percentage rate of tax that the profits from which the dividend was paid were subjected to in the foreign territory.

However, the geographic limitations of the Participation Exemption to distributions received from companies that are resident in a ‘relevant territory,’ is inconsistent with major competitor jurisdictions, as such regimes generally apply to a wider range of territories. A favourable expansion of the geographical scope in future iterations of the Participation Exemption would allow Ireland to align with international standards and ensure Ireland is not disadvantaged in securing foreign investment and international business.

The criteria of ‘relevant subsidiary’ within the Act give rise to certain complexities in establishing what entities may qualify for the exemption. For example, the ‘relevant subsidiary’ may not have knowledge of the historical residence status of another company from which it purchases assets or business, particularly if that company is a third party.

Conclusion

The introduction of the Participation Exemption ensures that Ireland’s holding company regime remains competitive and enhances its ability to attract international business. However, as the first iteration of such an exemption within Ireland, further consideration of the new measures may be required in recognition of the restrictions of the provisions as noted above. An expansion and simplification of the criteria of the Participation Exemption is desirable to secure and solidify Ireland’s position as a destination for foreign investment. Nevertheless, the Participation Exemption is a welcome addition to Ireland’s overall holding company tax regime.