Planned participation exemption for foreign dividends

The current regime for taxation of foreign dividends

Currently, Ireland has a “tax and credit” system for foreign dividends. Foreign dividends received by Irish resident companies are subject to Irish corporation tax and credit is given for tax paid overseas. Although no additional tax is charged to Irish companies on foreign dividends received, the rules are complex and place an administrative burden on the impacted Irish companies.

Proposed application of the exemption

The proposed change would exempt qualifying dividends received by Irish resident companies from corporation tax in Ireland and bring us in line with the EU and a substantial number of other OECD countries.

The existing tax credit system would continue to apply for non-qualifying foreign dividends, including dividends received by Irish companies from jurisdictions with which Ireland does not have a double taxation agreement and non-EU/EEA jurisdictions.

The exemption would apply to foreign dividends and other types of income distributions arising from shares or certain other rights to participate in a company’s profits. It would apply to income distributions only, irrespective of their source (trading or passive income). Capital distributions, for example, a distribution in the course of winding up a company, would continue to be taxed in accordance with existing capital gains tax rules.

Other conditions

Like Ireland’s capital gains tax participation exemption regime, companies must meet a 5% control test to qualify, including holding, directly or indirectly, 5% of the ordinary share capital of the foreign company. This shareholding should be held for an uninterrupted period of twelve months up to and including the dividend payment date. Dividends from newly acquired shareholdings may also qualify, provided the shares are held for twelve months.

While qualification requires a minimum ownership of ordinary shares in the foreign company where that qualification has been established, the exemption may also apply to dividends received from that company on other types of shares, such as preference shares.

Anti-avoidance rules apply.

Optional v mandatory: A transitional period

It is proposed that companies would have the flexibility to opt into the participation exemption regime, with an election to apply for a minimum period of three years. The election would apply to all potentially in-scope foreign dividends received by the company during the three-year election period.

The existing tax credit system would continue to apply where a company does not opt into the new participation exemption regime.

Anti-avoidance

The consultation document notes that the exemption will operate within Ireland’s existing anti-avoidance framework and anti-base erosion (BEPS) measures. It is proposed that this be supplemented by additional anti-avoidance provisions, including the fact that the dividend must not be deductible for tax purposes in any other jurisdiction and that dividends from countries on the EU list of non-cooperative jurisdictions would not qualify.

A welcome proposal

The key features of Ireland’s proposed participation exemption regime for foreign dividends received by Irish companies are welcome, including its elective nature and its application to all profits.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Forvis Mazars corporate tax team below: