Irish Government publishes second Feedback Statement on introduction of participation exemption for foreign dividends

Introduction

On 27 August 2024, Ireland's Department of Finance (Department) published a second Feedback Statement (the FBS) on the introduction of a participation exemption (the exemption or the regime) for foreign dividends.

The FBS builds on the initial FBS (pdf) published in April 2024 and contains draft legislative approaches for the exemption. The FBS also notes that amendments to other areas of the Irish tax code may be required in tandem with the introduction of the exemption.

In the press release accompanying the FBS, Minister for Finance Jack Chambers stated that the introduction of the exemption "demonstrates Ireland's continued desire to promote a business environment that remains best in class" and "will provide stakeholders with the certainty and simplicity needed to continue to prosper in Ireland."

Detailed discussion

The FBS represents the next phase of Ireland's Roadmap for the Introduction of a Participation Exemption (pdf)for foreign dividends. The FBS builds on the initial FBS published in April 2024, which included a Strawman proposal setting out "a hypothetical example" of how the exemption might work in Ireland. Based on the responses1 received to that initial FBS, the FBS includes draft legislative text required to give effect to the exemption.

Some notable features of this draft legislation are broadly set out below:

• The exemption would apply to dividends, including certain distributions made on or after 1 January 2025 and paid out of "profits" as defined (essentially amounts that have been recorded in the income statement of the payor) in respect of a subsidiary's share capital, other than redeemable share capital. The "profits" condition and clarity on the meaning of redeemable share capital will be areas of focus in responses to the FBS.

• The geographic scope of the exemption would be limited to dividends received from companies that are resident and subject to corporate income tax in a European Union/European Economic Area (EU/EEA) Member State or in a jurisdiction with which Ireland has a Double Tax Agreement in place.

• Only dividends that constitute "income" for Irish tax purposes in the hands of the recipient would qualify for the exemption.

• To qualify for the exemption, a 12-month holding period and 5% minimum participation threshold must be satisfied.

• The holding period can be satisfied prospectively.

• The participation threshold requires a 5% holding of ordinary share capital, a beneficial entitlement to at least 5% of the profits available for distribution and assets on a winding up. These entitlements can be traced through certain affiliated companies.

• The Irish taxpayer would be required to "opt in" to the exemption on an annual basis by way of a claim in the corporation tax return for each accounting period. Once a claim is made, the exemption would apply to all in-scope dividends received in that period.

• Where the exemption applies, the Irish taxpayer would not be entitled to any relief by way of deduction, credit or otherwise for foreign tax paid in respect of the dividend(s).

• Where a claim is not made by the Irish taxpayer, Ireland's current "tax and credit" system for foreign-sourced dividends would apply to all in-scope dividends received in that period.

• Dividends received by certain investment funds/regulated entities (e.g., Undertakings for Collective Investment and Section 110 companies) are excluded from the scope of the exemption.

The FBS notes that a number of amendments to other provisions in Irish legislation may be required as a result of the exemption (e.g., the legislation in respect of Controlled Foreign Companies and certain elements of the Ireland's transfer pricing legislation for domestic non-trading transactions). Work is ongoing in this area and stakeholder feedback is requested in this regard.

Next steps

The publication of the FBS, including the draft potential approaches to the legislation, is a welcome development. However, there are several aspects to the proposed approach that fall short of investor expectations, including the geographic scope of the regime and the requirement to pay an exempt dividend out of "profits."

The FBS notes concerns about compliance with EU Code of Conduct rules and ensuring that the regime does not provide benefits that would adversely impact the qualifying status of Ireland's Pillar Two Income Inclusion Rule (IIR) and Qualified Domestic Top-up Tax (QDTT). It is also clear from our engagement to date with the authorities on this public consultation that the competitiveness objective is being balanced against a desire to prevent untaxed profits from being remitted to or through Ireland.

We will continue to engage with the Department on navigating these issues and with respect to striking an appropriate balance so that the exemption is competitive and in line with international best practice. Affected parties wishing to discuss the FBS ahead of the 5 September 2024 deadline should reach out to their tax advisors.