Tax treatment of interest in Ireland

Responding to the Department of Finance’s public consultation on the tax treatment of interest in Ireland, our Tax team makes several recommendations on how best to simplify the tax treatment of interest.

Ireland’s tax regime for businesses must be best-in-class if it is to compete for inward investment in the global tax environment. Our tax regime must also work for indigenous Irish businesses seeking to raise finance to support growth and scale up operations. Debt is a critical driver of growth. If relief for interest is not available, investment will move elsewhere.

Removing redundancy and cutting complexity in our interest deduction regime must be the objective in the design and administration of our tax system.

All businesses, but particularly large multinational businesses, have been subject to unprecedented levels of change in the area of tax in recent years. This change has almost exclusively had the effect of adding complexity, constraining business practices, increasing administrative burden and increasing the cost of doing business. Cumulatively, this trend has the potential to stifle growth and reduce the competitiveness of our economy. We believe that it is essential that Ireland streamlines the Irish tax code by eliminating provisions that are no longer necessary in light of those changes.

It is crucial that all future changes to the tax regime are framed by a growth mindset and designed in collaboration with businesses and practitioners. Positive changes to Ireland’s regime must be married with certainty for businesses so that we compete effectively for foreign investment and support indigenous businesses.

Recognising that the relative stability of Ireland’s tax regime over many decades has been a major benefit for Ireland’s economy and the businesses operating here, fundamental reform of the taxation of interest should be undertaken with the greatest caution and transparency.

Consequently, throughout our response we recommend that a process of substantial simplification of the tax treatment of interest is first undertaken. Any changes to the tax system arising from this process should then be allowed to become well embedded and their effects understood before a more broadscale reform of the regime is contemplated.

Our recommendations on how best to fundamentally simplify the tax treatment of interest are as follows:

Apply the 12.5% rate of corporation tax to passive interest income
Simplify the treatment of interest income ancillary to a trade
Expressly provide for the deduction of expenses (including interest) incurred in the earning of passive income against that income
Provide Revenue guidance, based on caselaw, on the principles used to establish the source of interest for tax purpose
Remove or better focus the anti-avoidance provisions contained in Sections 812, 813 and 817B
Reduce the 2-year holding exception in Section 815 to 12 months

Retain the wholly and exclusively principle for deduction of interest expense
Enhance Ireland’s qualifying financing regime
Reform the provisions applying to the deductibility of interest expenses in determining rental profits
Retain but substantially simplify and streamline the relief afforded for interest as a charge on income under Section 247. Also, the recovery of capital rules in Section 249 require radical simplification
Remove duplication and simplify the CGT relief given to companies for interest and allow a deduction for interest expense incurred on the acquisition of land

Remove the cliff-edge effect when applying the de minimis exception
Clarify the application of the rules for partnerships
Ensure fair treatment of capitalised interest
Broaden the definition of “large-scale asset” to better align it with Ireland’s strategic development goals

Remove Sections 254 and 817C and Section 126 SDCA 1999 which have been superseded by the interest limitation rules
Remove Section 840A or at least focus its application so that it does not preclude genuine commercial reorganisations
Condense the provisions which over-ride Section 130 into a single section
Broaden the exceptions provided for in Sections 452 and 845C
Remove the 80% cap on interest expense under Section 291A
Remove Section 437 which has become outdated
Retain the domestic transfer pricing exemption
Provide clarity on the application of the anti-hybrid rules to partnerships

Broaden the exceptions provided for in the taxation of stock lending and repo transactions and the taxation of securities
Enhance Section 110

Simplify the withholding tax exemptions in Section 246
Provide parity of treatment between foreign and Irish paying agents in Section 64
Clarify the application of Section 845C to non-banks
Abolish encashment taxes

Substantially reduce the unnecessary administration and compliance burden on taxpayers
Eliminate the requirement for reporting under Sections 36, 64, 76E, 891, 891A and 891B
Ireland should actively engage with the European Commission in its review of DACs

Consultation on the Tax Treatment of Interest in Ireland

(PDF, 627 KB)

Download the full consultation document

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