Tax changes for Asset Management & Funds

Exclusion from scope of rules

A key consideration for funds and fund structures is whether they fall within scope of the rules in the first instance. In this regard, there are a number of categories of entities which are specifically excluded from the rules, such as:

i. Any investment fund (as defined) which is an ultimate parent entity (i.e. broadly speaking, which is not consolidated into any other entity, irrespective of whether consolidated financial statements are required to be prepared); or

ii. Any entity which is at least 95% owned by an entity referred to at (i) above, that operates exclusively (or almost exclusively) to hold assets or invest funds for the benefit of the entity referred to at (i) or exclusively carries out activities ancillary to those performed by it; or

iii. Any entity which is at least 85% owned by an entity referred to at (i) above provided that substantially all of its income is derived from dividends or gains that are excluded from the calculation of income for the purposes of the rules.

An investment fund for the purposes of the above is defined as an entity (which includes a partnership) which:

• is designed to pool financial or non-financial assets from a number of investors, some of which are not connected;
• invests in accordance with a defined investment policy;
• allows investors to reduce transaction, research and analytical costs or to spread risk collectively;
• has as its main purpose the generation of investment income or gains, or protection against a particular or general event or outcome;
• its investors have a right to return from the assets of the fund or income earned on those assets, based on the contribution they made;
• is, or its management is, subject to the regulatory regime, including appropriate anti-money laundering and investor protection regulation for investment funds in the jurisdiction in which it is established or managed; and
• is managed by investment fund management professionals on behalf of the investors.

In practice, it is expected that many investment funds and entities within investment fund complexes should fall outside the scope of the rules. That said, it is not clear that all collective investment vehicles will automatically satisfy the above conditions. Furthermore, there are some circumstances where a fund could require consolidation such that it will not automatically fall outside the scope of the rules. Alternatively, there may be aggregator or other similar entities in a fund structure which complicate the application of the 95% and 85% tests previously mentioned. On a separate note, there is no exclusion applicable to investment management entities, which need to be assessed based on the relevant facts and circumstances in the context of the corporate groups which they are part of.

Back to top

Although there is a broad exemption from the scope of the rules which can apply to both fund and below the fund vehicles, it should not automatically be assumed that fund complexes are fully outside the scope of the rules. In this context, the following considerations are important:

• Is the fund vehicle itself consolidated into another entity or would it require consolidation should any investor(s) prepare consolidated financial statements?
• Do below the fund vehicles meet the relevant criteria in every case, particularly where the consolidated turnover of the fund structure exceeds €750m?
• Are there non-consolidated entities in the structure which are 50%+ held, particularly where the consolidated turnover of the fund structure exceeds €750m?

If the answer to any of the above is yes, it is important to consider the extent to which the rules might apply in more detail in the context of the fund structure (in addition to considering application in respect of any management entities).

Back to top

As noted above, the rules operate by disapplying existing domestic exemptions however there are some nuances depending on the type of payment in scope:

Interest

Where a company makes a tax-deductible interest payment 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), the legislation will disapply the application of the existing Irish domestic interest withholding tax exemptions, which could result in the application of 20% withholding tax to payments which were previously exempt.

The legislation will also bring ‘short’ interest payments – interest payments on loans with a term of less than 12 months – made to an entity in a specified territory within the scope of Irish withholding tax.

Notwithstanding the above, there is an exclusion from the legislation which will result in an interest payment continuing to qualify for exemption (assuming the relevant conditions are satisfied) where:

1. the recipient makes an onward payment of a corresponding amount (the meaning of which is undefined) to another entity within 12 months;
2. the corresponding amount would have been an excluded payment if it had been made directly to that entity (e.g., the payment would have been subject to tax); and
3. the payments were made for bona fide commercial purposes.

Whilst this is helpful, it only addresses a situation where there is an onward payment of a  corresponding amount direct to another entity within 12 months and therefore where there are multiple tiers of intermediate recipients, there could be withholding tax.

Distributions / dividends

Where a company makes 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 will be disapplied. However, the new withholding tax provisions will not apply where the distribution is being made out of income, profits or gains that have been subject to (i) Irish domestic tax, (ii) foreign tax at a nominal rate greater than 0%, or (iii) a CFC charge or a top-up tax under Pillar Two. In addition, the provisions should not apply to distributions made out of foreign branch profits that are subject to foreign taxation.

The range of exclusions included in the legislation for distributions should therefore allow a company to effectively look up and down its ownership chain when considering whether the profits being distributed have been subject to tax within the group’s corporate structure, and whether the distribution should therefore fall outside the scope of the new withholding tax requirements. 

Back to top

Irish Revenue recently published eBrief No.252/23 to highlight that they have updated their Tax and Duty Manual (TDM) Part 08-03-06 “Payment and receipt of interest and royalties without deduction of income tax”. In this updated guidance Revenue have included a new section which provides a basis for existing domestic withholding tax exceptions to be applied on a “look through” basis where interest is paid to Irish partnerships and foreign tax transparent entities, provided certain conditions are satisfied.

This updated guidance is welcome in the context of a practical issue which used to arise where interest was paid to a partnership (or foreign tax transparent entity) which had partners who would be entitled to a domestic withholding tax exemption. Prior to the guidance, a 20% interest withholding tax would potentially need to be applied at source and subsequently reclaimed by partners in the partnership (or foreign tax transparent entity) entitled to a domestic exemption from withholding tax.

Specifically, the guidance clarifies that Revenue are accepting of a ‘look through’ approach being applied to interest which is paid to an Irish partnership (or a tax transparent foreign entity) subject to the following conditions:

1. All members of the partnership or tax transparent foreign entity would qualify for exemption from withholding tax which would apply if the interest was paid directly to the members;
2. The Irish partnership or tax transparent foreign entity is considered to be tax transparent in its jurisdiction of residence (or place of creation) and by all of the jurisdictions where the members of the tax transparent entity are resident i.e., the interest income is treated as arising to those members directly, and
3. Where business is conducted through the Irish partnership or tax transparent foreign entity for non-tax commercial reasons and not for tax avoidance purposes.

The updated TDM notes that if any member of the transparent entity cannot satisfy these conditions, withholding tax should be deducted from the gross interest payment.

Whilst we welcome these changes in the context of structures which utilise partnerships or tax transparent foreign entities, it will be necessary to be comfortable that all members are residents of a relevant territory (another EU member state or country with which Ireland has a double tax treaty) in line with the relevant withholding tax exemption requirements. 

Back to top