Financial services tax

The Finance Bill contained some a number of financial services related measures which will of particular interest to companies operating within the leasing and banking sectors.

In general, only the owner of plant and machinery can claim capital allowances. However, there are rules which provide that where plant or machinery is leased and the lessee bears the burden of wear and tear, the lessee may claim allowances.

Before 2024, allowances could only be claimed where the lease was a finance lease. Finance Act 2023 changed these rules to apply them to ‘relevant leases’ as defined, which includes finances leases as well as operating leases where (i) the discounted present value of the lease payments is 80% or more of the fair value of the leased machinery or plant; (ii) the lease term equals or exceeds 65% of the predictable useful life of the leased machinery or plant; and (iii) the lease is granted on such terms that the use and enjoyment of the leased machinery or plant is obtained by the lessee for a period at the end of which it is considered likely that the leased machinery or plant will pass to the lessee. In the case of these operating leases, a number of additional criteria have to be satisfied in order for the lessee to claim allowances, including that the lessor acquired the leased machinery or plant by way of a bargain made at arm’s length, the machinery or plant belongs to the lessor before and during the lease term, and the lease is entered into by way of a bargain made at arm’s length. The Bill provides for the abolition of these additional criteria for lessees with effect from 1 January 2025.

Finance Act 2023 also introduced a change to the balancing allowances and charges rules by providing that an event giving rise to a balancing allowance or charge can occur for the lessor when entering into a relevant lease, and similarly for a lessee on the conclusion of the relevant lease, where the machinery or plant returns to the lessor rather than ownership transferring to the lessee. In practice lessors will sometimes enter into a lease some time in advance of the leased machinery or plant being made available to the lessee. This can cause a practical issue because the aforementioned rule deeming there to be a balancing event upon entering into the lease is framed with reference to the leased machinery or plant belonging to the lessor before entering into the lease.

The Bill includes a measure to address such situations whereby if the lease is entered into before the machinery or plant is made available to the lessee, the requirement for the machinery or plant to belong to the lessor is tested at the time the machinery or plant is made available to the lessee. This deeming provision will not apply if it is reasonable to consider that the reasons for the date when the lease was entered into and the date the machinery or plant was made available being different were not bona fide commercial reasons or if the use of different dates is part of an arrangement under which a tax advantage arises where either that tax advantage is priced into the terms of the arrangement, or the arrangement was designed to give rise to a tax advantage. A tax advantage will arise for these purposes if the total tax relief claimed by the lessee (through Irish or foreign capital allowances and / or other rental deductions) materially exceeds the aggregate of the lease payments over the lease term. This change is to have effect from 1 January 2025.

The general rule that a company should compute its taxable profits based on its accounting results is disapplied in the case of a company which leases machinery or plant under a finance lease. Instead such a company is subject to tax on the gross amount of rents receivable by it. This treatment is a corollary of the fact that such a company may be entitled to claim capital allowances on the leased machinery or plant and ensures that the commercial profits which the company earns are ultimately subject to corporation tax. However, as noted above there are situations where a lessee may be entitled to claim capital allowances on leased machinery or plant.  Where this occurs, the lessor is not entitled to allowances. By longstanding practice, the Revenue Commissioners allowed such lessors to be taxed on their finance margin (effectively in line with their accounting results) where the lessee was the party claiming the allowances.

Finance Act 2023 put this practice on a statutory footing and introduced further amendments which confirmed that in calculating the profits of a trade, the income from a lease (in the case of a lessor) and the lease rental payments (in the case of a lessee) to be included in the tax computation are the gross payments under the lease (and not just the amounts recorded in the company’s profit and loss account). However, the legislation provides that a lessor can choose to apply a different treatment in the case of ‘relevant leases’ (as described above), such that the lessor is to be taxed on the financing margin recorded in its financial statements (or, in the case of a relevant lease which is not a finance lease, the amount that would be so recorded if it were a finance lease).

For a lessor to qualify to apply this modified treatment such that it is taxed only on the financing margin, the conditions that currently have to be met for a lessee to claim capital allowances (referred to above) must be satisfied in respect of the lease and the leased machinery or plant. While the Bill includes a revocation of the conditions insofar as they apply to lessees, it does not provide the same for lessors. That said, the Bill does amend some of these conditions.

At present, to satisfy the conditions, the lessor must have acquired the leased machinery or plant by means of a bargain made at arm’s length. This requirement could preclude a lessor qualifying where they had acquired the machinery or plant from a connected party and had made an election for the transfer to be treated as occurring for the tax written down value of the machinery or plant. The Bill includes a change to permit such situations.

There is also a requirement that the asset belong to the lessor immediately before the lease is entered into which, as discussed above, may not always be the case. The Bill includes a measure to address such situations whereby if the lease is entered into before the machinery or plant is made available to the lessee, the requirement for the machinery or plant to belong to the lessor is tested at the time the machinery or plant is made available to the lessee.

In addition, the legislation currently requires that where the lessee is not Irish tax resident, it must be reasonable to consider that the amount of lease expenditure deductible by the lessee for foreign tax purposes is similar to that calculated under the equivalent Irish rules (essentially an amount equivalent to the financing margin of the lease rentals and not the gross rental expense). This requirement has sometimes proven difficult for lessors to satisfy. Consequently, the Bill removes this requirement and replaces it with a new condition that applies only where the lessee is an associated enterprise (broadly this requires 25%+ common ownership). This new condition provides that, at the commencement of the lease, it must be reasonable to consider that the total foreign capital allowances claims which the lessee will be entitled to will not materially exceed the difference between the total lease payments (over the term of the lease) and any other foreign tax deductions that the lessee may be entitled to in respect of those lease payments.

In broad terms this is intended to ensure that the Irish lessor can only be taxed on its financing margin from a relevant lease (rather than the gross rental payments) where the total foreign tax relief claimed by the lessee (through capital allowances and / or other rental deductions) does not materially exceed the aggregate of the lease payments over the lease term. The Bill requires that if the lease terms are changed, a new assessment under this rule must be undertaken. This new rule is also to apply to a sub-lessee where the lessee sub-leases the machinery or plant to an associated enterprise.

The Bill also includes a new anti-avoidance rule which applies with respect to all leases and will prevent the lessor from making a claim to be taxed on its financing margin where it is reasonable to consider that the relevant lease has not been entered into for bona fide commercial reasons and is part of an arrangement under which a tax advantage arises where either that tax advantage is priced into the terms of the arrangement, or the arrangement was designed to give rise to a tax advantage. A tax advantage for these purposes essentially mirrors the assessment of the lessee’s position under the first new condition, i.e., a tax advantage will arise if the total tax relief claimed by the lessee (through capital allowances and / or other rental deductions) materially exceeds the aggregate of the lease payments over the lease term. This change is to have effect from 1 January 2025.

Under Irish tax legislation losses generated by excess capital allowances on leased plant and machinery may only be set off against income from the leased machinery or plant or, where the lessor is a company carrying on a trade of leasing, the profits from that trade. This is referred to as the ‘leasing ring-fence’. Finance Act 2023 widened the range of the activities that come within the ring fence. At present income from the following activities is treated as income from a trade of leasing in the context of the leasing ring-fence:

• the leasing of machinery or plant;
• the provision of loans to fund the purchase of machinery or plant;
• the provision of machinery or plant leasing expertise;
• the disposal of leased machinery or plant;
• the provision of intra-group finance and guarantees via intermediate financing companies;
• the disposal of the contractual right to acquire machinery or plant of a type which is similar to the type of machinery or plant leased by the leasing group where, at the time that the contract was entered into, it was intended that the machinery or plant was to be acquired and leased by the leasing group;
• the disposal of any part of an item of plant or machinery, where that plant or machinery was in use for leasing purposes; and activities which are ancillary to those set out above.

The Bill includes an amendment to the category relating to the provision of intra-group finance and guarantees via intermediate financing companies in order to remove incorrect drafting which required that the intermediate financing company borrow from a third-party. This is to be corrected such that the group company lending to the intermediate financing company must have borrowed from a third-party.  This change is to have effect from 1 January 2025.

The Interest Limitation Rule (“ILR”) was introduced in Finance Act 2021 as provided for under the EU’s Anti-Tax Avoidance Directive and came into effect from 1 January 2022. The ILR caps deductions for “exceeding borrowing costs” (i.e., a company’s interest (and equivalent) borrowing costs as reduced by its interest (and equivalent) income) at 30% of a corporate taxpayer’s earnings before interest, tax, depreciation and amortisation (“EBITDA”) as measured under tax principles. 

The interest equivalents that are in scope of the ILR include the finance element of finance lease payments. The portion of a finance lease payment (be it income or expense) that is treated as interest equivalent for the purposes of the ILR is determined by determining a fraction at the outset of the lease. The fraction is computed by dividing the total expected finance income (or expense) that will be recognised in the company’s accounts over the life of the lease by the total expected gross rent receivable (or payable) over the life of the lease. This fraction is then applied to the amount of taxable (or tax deductible) rent included in the company’s tax return each year. This approach estimates what amount of the finance lease payment equates to a financing return (or expense) and includes that portion in the ILR calculation.

While this approach makes sense in a scenario where the lessor is taxing the gross rental income (not just the financing margin) or a lessee is deducting the entire lease payment (not just the financing cost), the legislation has not taken into consideration a situation where a lessor is only taxing the finance margin (because it is not claiming capital allowances on the asset) or a lessee is only deducting the finance element of the lease payment (because it has elected to claim capital allowances on the leased asset). In these scenarios the amount of taxable (or tax-deductible) lease payment in the tax computation is already an amount equating to the financing return (or expense). Consequently, applying the prescribed fraction to this amount would give rise to an anomalous outcome.

In addition, Finance Act 2023 introduced provisions that would treat certain operating leases like finance leases for tax purposes. These are operating leases where (i) the discounted present value of the lease payments is 80% or more of the fair value of the leased machinery or plant; (ii) the lease term equals or exceeds 65% of the predictable useful life of the leased machinery or plant; and (iii) the lease is granted on such terms that the use and enjoyment of the leased machinery or plant is obtained by the lessee for a period at the end of which it is considered likely that the leased machinery or plant will pass to the lessee. Where an operating lease meets these criteria, the rent is to be recomputed as if it were a finance lease for accounting purposes thereby resulting in a (notional) financing margin and principal component. Under the ILR, where a company is carrying on a leasing trade, a slice of its operating lease income will be treated as an interest equivalent with that fraction being determined using a formula conceptually similar to that used for finance leases. Consequently, a similar anomalous result can arise for these leases.

The Bill includes an amendment to correct this issue such that where a lessor is only taxing the finance margin or a lessee is only deducting the finance element of the lease payment (either a finance lease or an operating lease within the scope of the abovementioned provisions), the full taxable (or tax deductible) amount of those payments will be treated as an interest equivalent for the ILR. The Bill also has an equivalent change in respect of lessors taxed under the short-life asset regime. These changes are to have effect from 1 January 2025.

Under the ILR, where exceeding borrowing costs are more than 30% of EBITDA, the taxpayer disallows that amount of a tax deduction. These disallowable amounts are carried forward and are tax deductible from total profits in future years where the taxpayer has sufficient capacity to claim the deduction (this would be the case where the company has not exceeded its 30% threshold in that later year). 

In addition, when ‘exceeding borrowing costs’ are below the 30% threshold, the unused amount is carried forward as ‘limitation spare capacity’. Moreover, where a taxpayer has financing income in excess of borrowing costs, this excess is carried forward as ‘interest spare capacity’. In future years where the taxpayer exceeds its 30% threshold, it can use this additional unused capacity to increase the amount of interest (or disallowed amounts carried forward) in that year.

The Bill contains an amendment to the rules governing the carry forward of the abovementioned attributes to clarify that where the disallowable amount or spare capacity was calculated in a currency other than euro, then it is to be carried forward in that currency rather than being converted to euro at the prevailing exchange rate. This change will mean that where a trading company with a non-euro functional currency carries forward a disallowable amount or spare capacity, its value will not increase or decrease as a consequence of foreign exchange movements. The Bill also includes rules that are to apply where such a company changes its functional currency. These changes are to apply to accounting periods beginning on or after 1 January 2025.

Irish stamp duty applies to financial cards issued to a person with an Irish address.

Stamp duty of 12 cent applies to each ATM withdrawal in Ireland, subject to annual caps of €2.50 for ATM cards and €5 for combined (ATM and debit) cards. An annual stamp duty charge of €30 applies in respect of credit card accounts and charge cards.

The Finance Bill amended these stamp duty provisions to specify that the stamp duty will also apply to electronic cards. This change has effect from the date the Finance Bill is enacted.

The amendments also align the stamp duty treatment of charge cards with the treatment of credit cards, whereby from 1 January 2025 the €30 annual charge will apply per account (rather than per card) for both charge cards and credit cards. There are various differences between credit cards and charge cards for the purpose of the stamp duty provisions. In particular, a charge card enables a user to acquire goods, services or cash, whereas a credit card must provide all three facilities.

The removal of the levy on a per card basis for charge cards should better align the duty provisions to modern secure card products which involve the issuance of multiple electronic cards to combat fraud.

A number of consequential amendments have been included to implement the above changes.

A revised basis for calculating the bank levy was introduced for 2024 which provides for the levy to be based on a percentage of in-scope deposits held by the relevant banks as at 31 December 2022 (instead of the previous DIRT-based formula). The Finance Bill extends the revised bank levy for one further year so as to apply into 2025. The levy applies to banks that received financial assistance from the State during the banking crisis (AIB, EBS, Bank of Ireland and PTSB). The revenue target of €200 million remains unchanged for 2025.