The first phase in its implementation commenced on 23 December 2020, with the publication by the Irish Department of Finance of a feedback statement with some initial drafting of the important provisions of the new legislation. The first phase of the consultation, which focused on the application of the rules to a single company, ran until 8 March 2021. A second round of consultation, which will focus on the legislative provisions specific to groups, is expected in mid-2021 with publication of the draft legislation in the Finance Bill in October/November 2021.

The ILR will restrict the tax deductible interest of an entity to 30% of its earnings before interest, tax, depreciation and amortisation (“EBITDA“) in a tax period. The ILR applies to the ‘net borrowing costs’ of an entity, which is the amount by which its borrowing costs exceed its taxable ‘interest’ revenues and other ‘economically equivalent’ taxable revenues.

The implementation date for the ATAD ILR was 1 January 2019. A derogation was available for Member States with existing rules which are “equally effective” as the ILR. This derogation allowed a Member State to defer implementation until 1 January 2024. Although Ireland’s interest regime does not have a specific EBITDA cap, it is quite a restrictive regime and Ireland initially took the view that the derogation should be available. However this was not accepted by the European Commission and thus the implementation of the ILR will now proceed with effect from 1 January 2022.

Key Issues in Ireland’s implementation

There are a number of key considerations in Ireland’s implementation of the ILR as follows:

  • Ireland already has very complex and restrictive interest deductibility rules and artificial distinctions between the tax rates applicable to different types of income and gains. The ILR (together with the recently introduced ant-hybrid rules and the expanded transfer pricing rules) present an opportunity to simplify the whole area of interest deductibility. It seems, however, that this opportunity will not be seized.
  • How should the definition of interest and income that is ‘economically equivalent’ to interest and the meaning of a ‘standalone entity’ apply to securitisations?
  • Will “EBIDTA” include all taxable income and gains of an Irish company or will the exclusion of capital gains result in an EBIDTA figure dissociated from commercial reality?
  • How to treat taxable foreign dividends which may be partly or wholly relieved by double tax credits under Ireland’s complex double tax relief system?
  • What ‘financial undertakings’ should be excluded from the ILR and how will this interact within a corporate group?
  • How will local notional groups work since Ireland does not have a consolidation option for Irish groups?
  • How will the exclusion of interest on “legacy debt” work?
  • As Ireland has a pressing need for investment in its infrastructure, what large scale infrastructure projects will be excluded from scope?

Arthur Cox LLP has made a submission to the Department of Finance in respect of these and other aspects of Ireland’s implementation of the ILR which you can access here.

If you would like to discuss this topic please contact a member of the Arthur Cox Tax Team.

1 EU Council Directive 2016/1164