Budget 2022 | Financial Services

Angela Fleming, Partner and Head of Financial Services Tax, provides an overview of the measures announced in Budget 2022 that are of relevance to the Financial Services sector. 

Interest Limitation Rules

In accordance with commitments to international tax reform, Finance Bill 2021 will complete the transposition of the Anti-Tax Avoidance Directives, including the introduction of a general limitation on interest deductions.

The Bill will introduce a limit on deductible interest expenses of 30% of EBITDA for companies within scope, for accounting periods commencing on or after 1 January 2022. Disallowed interest may be carried forward and may be deducted in future years if the company has sufficient interest capacity.

In line with the provisions of Article 4 ATAD, a de-minimis rule will apply where net interest deductions are below €3 million. Exemptions will apply for standalone entities, legacy debt the terms of which were agreed before 17 June 2016, and certain long-term infrastructure projects.

Companies may operate the restriction on a single entity or local group basis, and certain group reliefs may apply where the Irish taxpayer is part of a consolidated worldwide group for accounting purposes.

The introduction of these new rules will have a significant impact on part of the Financial Services industry. There has been extensive consultation on this matter with the Department of Finance, which BDO has been involved in, with the aim of ensuring that the requirements of the directive are met, while maintaining Ireland’s competitiveness generally and in this industry in particular.

Full details of the new rules will be contained in the Finance Bill, which is due to be published shortly.

 

Reverse Hybrid

It was also confirmed that full details of the Anti-Tax Avoidance Directive 2 (“ATAD 2”), Reverse hybrid mismatches, will be provided in the upcoming Finance Bill. As such, Ireland will meet its requirements to implement these rules ahead of the 1 January 2022 deadline.

Broadly, the anti-hybrid rules are aimed at preventing taxpayers from engaging in tax system arbitrage. The provisions seek to neutralise tax advantages, or mismatch outcomes, that arise due to arrangements that exploit differences in the tax treatment of an instrument or entity arising from the way in which that instrument or entity is characterised under the tax laws of two or more territories.

These final ATAD 2 changes aim to remove what are referred to as reverse hybrid mismatches. Reverse hybrid mismatches involve entities that are treated as transparent under the tax laws of the jurisdiction in which they are established but that are treated as taxable entities in the jurisdictions of some, or all, of their investors.

The careful implementation of these new rules will be important in the context of certain Irish investment fund vehicles, including the newly reformed Investment Limited Partnership (ILP) and the Common Contractual Fund.

 

Employment & Investment Incentive (EII)                             

Recognising the potential of the Employment Investment Incentive (EII) scheme to incentivise investment in start-up businesses and to stimulate job creation, it was announced in the Budget that the scheme is to be extended for another three years.  

In addition to the extension, a number of changes are to be made to the scheme to improve it. This includes opening up the scheme to a wider range of investment funds in order to attract more investors to the scheme. 

Currently, only funds established under an irrevocable trust with investors subscribing to such a fund and the subscription monies invested held by a trustee, as nominee, may be approved by Revenue. However, this mechanism does not cater for the full range of investors, some of whom may be pooled in limited partnership funds or structures not established under an irrevocable trust. Increasing the range of collective investment fund structures which can access EII tax relief is a welcome change, and should help to generate increased funding for SMEs.

 

Bank Levy 

The Bank Levy, which was due to expire in 2021, is being extended for one further year. The annual yield of this levy has been approximately €150 million to-date. However, it will apply to a reduced number of institutions, as Ulster Bank Ireland DAC and KBC Bank Ireland plc are exiting the Irish market. The banks who the levy will continue to apply to, will not pay any more in 2022 than they did in 2021, therefore the expected yield for 2022 will be in the region of €87m.

A review of the bank levy is to be undertaken in 2022.


If you have any queries related to the information above, please contact Angela Fleming at afleming@bdo.ie.

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