Irish Government to Introduce Corporation Tax Exemption on Foreign Dividends

Irish Government Plans to Introduce Corporation Tax Exemption on Foreign Dividends

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The Irish Government has published proposals to introduce a so-called participation exemption on corporation tax currently paid by corporate shareholders based in Ireland on dividend earnings from foreign holdings.

Participation exemptions are a tax relief vehicle used widely around the world to protect shareholders from what is sometimes viewed as a form of ‘double taxation’ on dividend earnings. Businesses pay corporation tax on gross profits before the net remaining is distributed among shareholders in the form of dividends.

In many jurisdictions, shareholders then have to pay tax on the earnings they receive from those dividends. This is viewed by some as a double tax hit, as the amount they earn has already been reduced by corporation tax.

The form and format of participation exemptions varies around the world. One common model is to have the exemption apply to dividends that come from foreign holdings. This makes a country more attractive as a location for holding companies, as it makes earnings from overseas subsidiaries more tax efficient.

This is the model Ireland is proposing. Ireland has achieved astonishing post-pandemic economic growth on the back of being able to attract multinational giants like Apple with one of Europe’s most attractive tax regimes. The government is looking to lock that in for the long term.

Levelling the global tax playing field

On the flip side, Minister for Finance Michael McGrath argues that the proposals also fit with Ireland’s commitment to levelling up the global tax landscape, and specifically to preventing multinationals exploiting tax regime differences to their benefit, but to the detriment of local economies.

Ireland was one of 135 countries to sign up to the OECD and G20’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS), a major global initiative to tackle tax avoidance and improve the coherence of international tax rules. The scheme asks signatories to implement 15 actions, one of which relates to clamping down on the practice of corporations using Controlled Foreign Companies (CFCs) to offshore profits to entities in other countries where the tax liabilities are lower. This is a cornerstone of the so-called ‘Pillar 2’, or second phase of BEPS.

McGrath said: “[BEPS Pillar 2] has been described as a once-in-a-generation agreement and the capstone to the process of international tax reform that began over a decade ago. In this context, the introduction of a participation exemption for foreign dividends to Ireland’s tax regime will provide much-needed administrative simplification and greater certainty for businesses, while continuing to ensure a robust and effective tax system.

“Ireland is committed to ensuring that our corporation tax code is competitive and attractive to business investment while maintaining consistency with international best practices.”

The roadmap for implementation published by the government includes a technical consultation that will be open until 13 December 2023, before proposed legislation is included in the Finance Bill 2024. It is expected measures would come into force in 2025.

If you have any queries or would like to know what this means for your business, get in touch with our experts today.

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