Irish Government publishes consultation on tax treatment of interest

• Ireland's Department of Finance has launched a consultation on the taxation and deductibility of interest by businesses in Ireland.
• The consultation is wide ranging and includes 26 questions related to the tax treatment of interest in Ireland based on current legislation. It also requests detailed observations around the design of a reformed interest deductibility regime.
• The consultation period closes on Thursday, 30 January 2025.

Executive summary

On 27 September 2024, Ireland's Department of Finance launched a consultation on the taxation and deductibility of interest by businesses in Ireland.

The consultation represents the first step in a wider review of Ireland's interest regime and, as stated by the Minister for Finance, Jack Chambers, "is timely to ensure Ireland's tax system remains resilient, supports competitiveness, protects the tax base, and aligns with our international commitments."

Ireland's existing rules on the taxation of interest income and the deductibility of interest expense consist of a decades-long accumulation of stand-alone rules lacking a coherent policy rationale. The conditions for interest deductibility often present significant difficulties for common commercial transactions. This is particularly acute for merger and acquisition (M&A) transactions, where the conditions are complex and prescriptive. If the conditions are not met, interest is simply not deductible, even if it is a normal commercial expense. Since the introduction of interest limitation rules, the Irish authorities have recognized that there was a need to rebalance the rules, which has led to this consultation.

Given the complexity involved and the interaction with various other aspects of Irish tax legislation, including those relating to the Pillar Two rules and the upcoming legislation introducing a participation exemption for foreign-sourced dividends, it is expected that the review of Ireland's interest regime will take place over a number of years.

Detailed discussion

The consultation is broadly divided into two sections.

The first section provides a broad overview of the current legislative provisions relating to interest, including the following:

• Rules governing the taxation of interest income
• Various interest deductibility provisions
• Ireland's interest limitation rules
• Specific rules for financial services transactions
• Interest withholding tax provisions
• Reporting obligations
• Various anti-avoidance provisions

This section of the consultation poses a series of questions related to the above. These questions generally appear to be focused on potential simplification or enhancement measures, along with their potential benefits and adverse consequences.

The second section focuses on a potential and more fundamental reform of Ireland's interest deductibility regime, which could provide for interest deductions more widely in both a trading and non-trading context.

Stakeholders are invited to provide their observations on how a reformed regime might work in Ireland and are invited to comment and provide examples where relevant to a series of specific questions in this context.

Next steps

EY Ireland welcomes the launch of this consultation and the opportunity to engage with the Irish Government and other stakeholders in relation to this matter.

EY Ireland will be responding to the consultation, addressing the current complexity of the existing rules and promoting consistency found in other modern tax systems. The focus will be on striking a balance between having proportionate anti-abuse measures that require transactions to take a particular form and achieving a tax system that taxes a commercial profit.

EY Ireland will be responding to the consultation, addressing the current complexity of the existing rules and promoting the need for a tax system that strikes a balance between having proportionate anti-abuse measures and taxing a commercial profit.

Affected entities will want to evaluate their perspectives and formulate responses to the consultation ahead of the 30 January 2025 deadline.

For additional information concerning this Alert, please contact:

Ernst & Young (Ireland), Dublin

• Joe Bollard
• Dan McSwiney
• Rory MacIver
• Brian Kelly
• Aoife Murray
• Cian O'Donovan

Ernst & Young (Ireland), Financial Services, Dublin

• Aidan Walsh
• Petrina Smyth
• Sandra Dawson
• Sinead Colreavy
• John Hannigan
• Michael Moroney

Ernst & Young (Ireland), Cork

• Aileen Daly

Ernst & Young (Ireland), Limerick

• Billy McMahon

Ernst & Young (Ireland), Waterford

• Paul Fleming

Ernst & Young (Ireland), Galway

• Paraic Waters

Ernst & Young LLP (United States), Irish Tax Desk, New York

• Robert Dunne
• Sarah Murray

Ernst & Young LLP (United States), Irish Tax Desk, San Jose

• Karl Doyle

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.