What will Budget 2025 have in store for Ireland’s Corporation Tax system?
The exchequer in Ireland continues to benefit from significant increases in corporation tax receipts with a total of €16.3 billion collected year to date. This is an increase of €3.6 billion compared to the same period in 2023.The overall Budget package will run to a total of €8.3 billion, and of this, taxation measure will account for €1.4 billion. Minister Jack Chambers, as he prepares to give his first Budget for Ireland, will be acutely aware that there is no guarantee that this level of funds will continue into the future and therefore, to continue to boost Irelands Corporate Tax regime, he will need to focus on domestic tax reform by simplifying our system in Budget 2025, and future Budgets.
We anticipate Budget 2025 will not introduce any complex legislation (unlike prior years where our corporation tax system has undergone international reform to take account of measures set out under the OECD BEPS Action Plan and the introduction of Pillar two legislation) but will be a first step towards the simplification of our Irish Corporate tax system through the introduction of a tax exemption on certain foreign dividends paid to Irish tax resident companies, launching a comprehensive review of Ireland’s interest deductibility rules and simplification of the availability to claim reliefs such as R&D tax credits, to name but a few.
Irish Dividend Participation Exemption
Participation Exemption in respect of tax on foreign dividends received by Irish Holding companies is due to come into effect on 1st January 2025 once enacted by Finance Act 2024. The current regime in Ireland operates a worldwide tax system which taxes both domestic and foreign profits of Irish resident entities. The proposed amendments aim to simplify this by exempting most foreign dividends from taxation. At present, Ireland is the only EU country that does not have such an exemption. Instead, a credit is given for any foreign tax suffered against the corresponding liability arising in Ireland.
The second feedback statement issued by Department of Finance on 27 August 2024 provides further clarity on the proposed legislative approach. Dividends within scope must be paid by a relevant subsidiary meaning a company within the charge to tax and resident in a relevant territory. A relevant territory for Participation Exemption refers to an EEA or a country with which Ireland holds a DTA. A relevant subsidiary will be required to meet the 5% ownership test whereby the parent must hold (directly or indirectly) not less than 5% of the relevant subsidiary’s ordinary share capital (other than redeemable share capital), be entitled to no less than 5% of the profits available for distribution and would be beneficially entitled to not less than 5% of the assets of the subsidiary on a winding up. Where the participation exemption is availed of by the parent company, a relevant claim must be made in respect of all relevant distributions in the accounting period. A relevant claim for the participation exemption is to be made on a year-by-year basis as part of the corporation tax return (Form CT1) to be filed by the parent company in respect of the accounting period in question.
We welcome the proposed introduction of a participation exemption into domestic legislation in Finance Bill 2024 so that foreign sourced dividends and distributions are fully exempt from tax in Ireland. This, we feel, is an important step towards an enhanced and simplified competitive tax system.
Ireland’s Interest Deductibility Regime
The Department of Finance and Revenue are reviewing Ireland’s interest deductibility regime, and plan to engage with stakeholders via a public consultation by the end of Q3 2024. This review will be extensive, considering multiple international tax changes, and will likely span several years.
While this initiative is welcome, further efforts are needed to simplify the tax system and reduce compliance burdens to keep Ireland competitive in the race for inward investment. This simplification aligns with broader EU and OECD trends, where policymakers are focused on decluttering and simplifying international tax frameworks. Ireland has a unique opportunity to lead in this area.
Ireland has a strong track record as an attractive business destination. Focusing on tax simplification and reducing compliance complexity would significantly enhance the country’s renowned ability to provide tax certainty and consistency for domestic and multinational entities.
Ireland’s R&D Tax Credit Regime
The ability to claim a R&D tax credit in Ireland forms a significant part of Ireland corporate tax offering when attracting FDI and helps foster an innovative and entrepreneurial domestic sector. Since its introduction, and in most recent years, there have been a number of legislative changes to the regime such as the introduction of the repayable credit, amendments to the provisions governing payment/offset of the tax credit, increase in the outsourcing limit for third level institutions and increase the rate of the tax credit from 25% to 30%.
However even with these changes more needs to be done in order to encourage SME’s to undertake high-valued R&D activity in Ireland. One amendment necessary is to condense the 3 year payment schedule into one year for SME’s to provide valuable assistance to smaller companies and increase the “science test” limit of €50,000 to apply per project rather than per claim. Such amendments would help further foster growth and competitiveness amongst the SME’s in Ireland.
Other areas that the Government could focus on, to support domestic entrepreneurship include:
- Simplifying the EIIS application processes
- Refining the CGT angel investor relief to make it more accessible and
- Increasing the €1m limit that applies to CGT Entrepreneur relief and/or reduced income tax rates on qualifying interest/dividends from active SMEs.
Finally, it’s not just individuals that are struggling with the increase in interest rates in combination with high inflation, many SME’s are struggling with debt repayments and increased costs that they may be finding difficult to pass on to the final customer. It would be important that the Government consider cost alleviating measures not just for individuals but for struggling businesses as well, especially if the Government wants to diversify its corporate tax receipts away from large multinationals which is a definite requirement given the volatility detailed above.
Budget Briefing Hybrid Event
RBK will be holding its annual Breakfast Budget Briefing as a hybrid event in person at the Athlone Springs Hotel in Athlone and streaming live online on Wednesday, 2nd October. Mike Scanlan, Tax Director, RBK will be analysing the tax measures announced in Budget 2025 and David McNamara, Chief Economist with AIB will look at the economic outlook.
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Should you wish to discuss any aspect of corporate tax, please contact our team:
Claire Fitzgerald - Tax Director - +353 (0)1 6440100
Chloe Kenny - Tax Assistant Manager - +353 (90) 6480600
