Finance Bill 2024 introduced Section 831B TCA 1997 into corporation tax legislation providing for a more simplified method of double tax relief by way of a Participation Exemption for certain foreign distributions with effect from 1 January 2025. 

Current Regime 

Prior to Finance Bill 2024, Ireland operated a “tax and credit” regime to dividends received by Irish resident companies from foreign resident companies. In essence, dividends received by Irish resident companies from foreign resident companies’ are taxable at 25% as Case III Income. There are however, a number of reliefs available such as Section 21B TCA 1997 or Schedule 24 TCA 1997 which can be used to reduce or eliminate tax payable on receipt of such income. It is important to keep this in mind in the context of the introduction of this new participation exemption regime. The introduction of a Participation Exemption will not eliminate the current regime that is in place but instead can be used as an alternative taxing option. 

How does the Participation Exemption work?

• The treatment under this regime is optional and is available by way of an election on the corporation tax return of the recipient company in the year in which the distribution(s) is received. 
• If the election is not made, then the status quo remains (i.e. tax and credit approach will continue to apply on the distributions(s) received. 
• If the election is made, all “qualifying distributions” received will be exempted from corporation tax and all “non-qualifying distributions” will continue to be taxed under the current tax and credit regime. 
• Effective from 1 January 2025 onwards, “qualifying distributions” that a “parent company” receives from a “relevant subsidiary” who resides in a “relevant territory” will be treated as exempt income for corporation tax purposes, upon election. 
• The “parent company” must hold at least 5% (directly or indirectly) of the ordinary share capital of the “relevant subsidiary” and have 5% or more profits and asset entitlement for a continuous period of at least 12 months at the date of the distribution. 
• Companies resident in a “relevant territory” include companies resident in EU/EEA states or in a tax jurisdiction with which Ireland has a double tax agreement at the date the “qualifying distribution” is made and throughout the five- year period prior to the date of distribution. 
• The exemption is not available for distributions from jurisdictions included on the EU list of non-cooperative jurisdictions for tax matters. 
• The “relevant subsidiary” (i.e. the company making the “relevant distribution”) must be, by virtue of the law of a relevant territory, resident for the purposes of a foreign tax that generally applies to income, profits and gains which corresponds to Irish corporation tax and is imposed at a nominal rate greater than zero per cent. The subsidiary cannot be generally exempt from foreign tax in that territory. It must be so resident both at the time of paying the “relevant distribution” and from either the time of its incorporation up to date of payment of the relevant distribution or for a 5 year period up to that date, whichever is the shorter (known as the “relevant period”). In addition, it must not have, within that “relevant period”, acquired any part of another business or the whole or greater part of the assets of another business, where the business concerned was previously carried on by another company that was not resident in a “relevant territory” during that same period. Neither can the “relevant subsidiary” have been formed through a merger at any time during that period, where a party to the merger was another company that was not resident of a relevant territory during the “relevant period”. 
• The “relevant distribution” must be paid or made. In this regard, a “relevant distribution” is a dividend paid, or other distribution made in respect of the share capital of a “relevant subsidiary” either “out of profits” or “out of assets”, as the case may be, of the “relevant subsidiary” that constitutes income in the hands of the recipient which would otherwise be taxable as Case III income (or Case IV income in respect of S138 type dividends). The terms “out of profits” and “out of assets” are important and are considered below as follows: 
  • “out of profits” - The definition of “profits” follows that adopted in 21B as “the amount of profits, after taxation, as shown” in the profit and loss account or income statement of the company. Therefore, in effect, all ‘relevant distributions’ paid out of a reserve traceable to profits that have been shown in the income statement or profit and loss account of a “relevant subsidiary” have the potential to qualify. Companies that are already availing of 9I or 21B(3) treatment will be familiar with the need to identify “profits” out of which the dividend is said to have been paid and will be familiar with having to undertake such identification and tracing exercises. However, where it is not possible to trace a dividend as being paid out of “profits” then consideration would need to be given to whether or not that ‘relevant distribution’ can instead be said to have been paid “out of assets” (discussed below). It is expected that it will not be necessary to be eligible for S626B relief in respect of shares in a “relevant subsidiary” if claiming Participation Exemption in respect of a “relevant distribution” paid out of “profits” - this was the understood intention but the current wording makes that position slightly uncertain. It will be seen below that such a condition does exist if a “relevant distribution” is made out of “assets”. To ensure that relief is being claimed on the basis of a “relevant distribution” being paid “out of profits” (and avoid the need to undertake a S626B analysis) it may be important to properly document in the paying company that the dividend is being paid out of specific profits of a period or periods. 
  • “out of assets” - Where a relevant distribution is not paid out of “profits” of the “relevant subsidiary” (e.g. it may not have sufficient reserves to make a distribution resulting from a capital reduction, the particular “relevant subsidiary” may not be required to have reserves to make a distribution under foreign corporate law or the foreign law may permit a distribution from a share premium account) then it may still be possible to get Participation Exemption treatment on the receipt. Such treatment may be available where the ‘relevant distribution’ is made “out of the assets of the relevant subsidiary where the cost of the distribution, or that part of the distribution, as the case may be, falls on the relevant subsidiary”. However, in such circumstances, the conditions of the Section 626B substantial shareholding exemption must also be met in respect of the shares of the relevant subsidiary. 
• Certain distributions are specifically excluded from the meaning of “relevant distribution” such as:
  • a distribution that has been, or may be, deducted for the purposes of tax in any territory outside the State, 
  • a distribution in a winding up, 
  • any interest or other income from debt claims providing rights to participate in a company’s profits, 
  • any amount considered to be interest equivalent within the meaning of section 835AY, or 
  • any dividend paid or other distribution made by an offshore fund within the meaning of section 743.
• Section 110 companies are not eligible for Participation Exemption treatment.

Next Steps 

The Minister of Finance, Jack Chambers, specifically mentioned that consideration will be given to the possible extension of the participation exemption regime to include foreign branch profits and the extension of geographic location/scope (i.e. extension beyond EU/EEA and DTA states). 

How can RBKtax help? 

Whilst the introduction of the Participation exemption is welcome and will hopefully be extended further we fully appreciate the administrative burden it will create to track the “relevant distribution”. If you wish to discuss any aspect of the regime please reach out to the authors or your preferred RBK contact.

• Claire Fitzgerald, Tax Director 
• Jackie Masterson, Tax Partner

Disclaimer: While every effort has been made to ensure the accuracy of information within this publication is correct at the time of going to print, RBK do not accept any responsibility for any errors, omissions or misinformation whatsoever in this publication and shall have no liability whatsoever. The information contained in this publication is not intended to be an advice on any particular matter. No reader should act on the basis of any matter contained in this publication without appropriate professional advice.