Forvis Mazars Budget 2025 insights with Irish Tax Monitor: Part one

Investment funds: How tax reform can benefit Irish investors

Tax director Joe Walsh outlines how reducing investment tax burdens and levelling the playing field would bolster Irish investment funds.

Over the past 30 years, Ireland has established itself as a prominent hub for the global investment industry. However, a notable anomaly in this success is the relatively low level of investment from Irish retail investors.

The primary reason for this anomaly is the high tax burden imposed, with Investment Undertaking Tax (IUT) generally set at 41%, compared to Deposit Interest Retention Tax (DIRT) on deposit interest and Capital Gains Tax (CGT), both at 33%. IUT is levied irrespective of the retail investor's individual circumstances, even when they have incurred losses on other investments.

Currently, Irish retail banks offer interest rates on deposits ranging from 0.01% to 3%, which, when compared to inflation at 6.3%, results in an economic loss of at least 3.3%. Finance Bill 2024 presents the Government with an opportunity to create a more equitable landscape for investors.

By aligning the IUT rate with the lower DIRT and CGT rates, the Government can support the domestic fund industry and provide Irish retail investors with a viable alternative to leaving their money in low-interest deposits. While the risk profile of investments in funds is higher than that of deposits, a properly managed portfolio of fund investments can yield modest returns for Irish retail investors. However, a crucial aspect of this investment strategy would be the ability to offset any losses made on one investment against gains from others.

In turn, increased investment in these funds could benefit the local economy with more significant investment in Irish housing and infrastructure projects – areas where the Government is struggling to meet the demands of Ireland’s rapidly growing economy.

Housing: New measures to tackle housing crisis and boost affordability

Tax partner Claire Healy expects Budget 2025 to tackle the housing crisis with expanded support for first-time buyers, potential VAT reductions on new homes, and increased tax relief for renters and landlords to boost affordability and market stability.

With housing recognised as one of the biggest domestic issues facing the Government, as well as an issue for attracting Foreign Direct Investment, Budget 2025 is expected to include several initiatives aimed at addressing this issue. The Help to Buy scheme, extended in Budget 2024 until 31 December 2025, currently allows taxpayers to claim refunds on income tax and DIRT paid in the previous four years for the purchase of new properties. To further support first-time buyers in a market with limited new build supply, it is hoped that this scheme will be expanded to include second-hand properties. Additionally, increasing the current property price limit of €500,000 would provide access to the scheme for those looking to buy in cities and towns, where new builds frequently exceed this threshold.

To improve the affordability of new homes, a temporary reduction of the current 13.5% VAT rate—potentially for two years—could be considered. However, to ensure that the cost savings are passed on to buyers rather than being offset by higher property prices, a mechanism would need to be put in place.

The Government has also indicated that further tax relief may be made available to landlords. The tax relief of up to €600 introduced in Budget 2024 is expected to be extended in Budget 2025 as an incentive for landlords to remain in the rental market. Additionally, an increase in the renters’ tax credit from the current €750 to €1,000 would be a welcome measure to help alleviate the burden of high rental costs in Ireland.

Tax simplification: Widening the scope of participation exemptions

Tax director Joe Walsh writes that Finance Bill 2024 offers Government the opportunity to simplify Ireland’s tax code to bring it in line with our EU counterparts.

Following the Strawman Proposal issued by the Department of Finance earlier this year, it is anticipated that Finance Bill 2024 will include legislation to implement a Participation Exemption for foreign dividends received by Irish companies. While this would be a welcome simplification, it addresses only a small part of the overhaul needed to bring Ireland’s tax code in line with our EU counterparts.

Currently, Ireland operates a worldwide system of taxation, offering credits for foreign taxes paid. The rules for calculating the Irish measure of foreign income and the associated tax credit are complex and differ depending on the source and type of income. International tax changes initiated by the OECD and EU – such as Interest Limitation Rules, enhanced Transfer Pricing requirements and the 15% global minimum effective tax rate – have been layered on top of the existing Irish tax code, adding further complexity for multinational enterprises to navigate. These complexities often lead to inequitable outcomes and provide little benefit to the Exchequer.

To address this, Government signalled a shift towards a territorial system of taxation by implementing Participation Exemptions. When first announced in September 2023, the Participation Exemptions were expected to apply to both foreign dividends and foreign branches of Irish companies. While progress has been made on the Participation Exemption for foreign dividends, the branch exemption has been delayed, with no clear reason why both could not have been introduced concurrently. Although it has been indicated that work will begin on the branch exemption for Finance Bill 2025, there is no sign of a broader project to reduce the overall complexity of the Irish tax code. With a general election looming, it remains uncertain whether these reforms will stay on the agenda for any incoming government.