Participation Exemption for Corporation Tax

The Department of Finance's consultation period on the introduction of a Participation Exemption for Corporation Tax ended in mid-December. Can you comment on the plans? 

Ireland operates a worldwide tax regime meaning all profits, including foreign source profits, are taxable by an Irish resident company with double tax relief for the foreign tax paid, referred to as the “tax and credit” model. Ireland stands out as it is the only EU country and one of a very small number of OECD countries that does not currently implement any form of participation exemption for dividends. 

The potential introduction of territorial elements to the corporation tax system were reviewed with the launch of a public consultation on a territorial system in December 2021. The initial consultation was to act as a scoping exercise and some key themes came from the responses including: 
•    The participation exemption should be implemented for both foreign dividends and foreign branch profits. 
•    The participation exemption should be an option and the current tax and credit system should remain in place.
•    The conditions should be aligned with the conditions which already exist under Section 626B. 
•    There should be no trading requirement to avail of the exemption. 
•    The 25% corporation tax rate should be removed. 
•    The UK participation exemption regime is a good example of how the Irish regime should be implemented. 

On 14th September 2023, the Department of Finance published a roadmap for the introduction of a participation exemption which included a timeline for the implementation. As part of this, a consultation period was open until 13th December 2023 which included 53 questions that were tailored to gather further information on the above key themes. Some of the questions asked included a request for an opinion on the design of the exemption, including whether we should adopt similar designs to other jurisdictions, what jurisdictions the exemption should apply, should the income be excluded from the charge to tax or included with a deduction in arriving at the taxable income, should full or partial relief be available, what types of dividends should qualify, should a minimum shareholding apply and should the exemption be optional. 

The roadmap also advices that the department is committed to further detailed examination of policy considerations relevant to the possible introduction of a foreign branch participation exemption. The consultation raised 8 queries aimed at gathering additional information.

The Department will consider the responses and further stakeholder engagement until March 2024 and the expectation is that the legislation for the participation exemption on foreign dividends will be delivered in Finance Bill 2024 in the final quarter of the year and will take effect from 2025. 

It is clear that the introduction of a participation exemption for foreign dividends and foreign branch profits will be well received with the consensus view that Ireland’s current worldwide system of taxation reduces our attractiveness as a location for inward investment due to the complexity and administrative burden of operating the tax and credit model. The introduction of a dividend participation regime is long overdue, particularly in light of the recent introduction of Pillar Two, and we eagerly await sight of the draft legislation, following receipt of the submissions made.

Contributor: Michelle Adams – Manager, Financial Services Tax

Content adapted from Finance Dublin's The Irish Tax Monitor.