Earlier this year, Ireland implemented the interest limitation rule (ILR) with effect from 1 January 2022. The ILR stems from Council Directive (EU) 2016/1164 (ATAD) and aims to limit the deductibility of interest payments and to battle tax avoidance through excessive interest payments. The Finance Act 2021 is the domestic legislative basis for the ILR. Ultimately the effect of the ILR is that it will deny a tax deduction for the net interest expense (i.e. the gross interest expense less the interest and/or interest equivalent income) that exceeds 30% of EBITDA (earnings before interest, taxes, depreciation and amortization).
the general effect of the ILR including the de minimis threshold of €3m per year, which applies to the group as a whole, and the consequences of exceeding this threshold
the number of potential exclusions and exemptions (in addition to the de minimis threshold) from the ILR which have been included in Irish legislation. We have looked in detail into the issues of legacy debt (i.e. debt the terms of which were agreed before 17 June 2016, and contracts entered into for the sole purpose of reducing interest rate risk on that debt) and standalone entities (an entity without a foreign branch, which is not included in a financial statements group consolidation and has no associated enterprises)
the concept and constraints of an interest equivalent income
the consequences of a deduction being disallowed are that the disallowed excess interest costs can be carried forward for potential deduction in future years. Alternatively, in the case of a company which has exceeding borrowing costs below the 30% EBITDA threshold, the unused amount can be carried forward as ‘limitation spare capacity'
the possibility of companies electing to join an interest group, where spare capacity can be pooled between members
the group reliefs that are available, as well as the concept of a single company worldwide group, and the application of the group ratio and the equity ratio
For more information on this topic, please contact James Somerville (Partner) or any member of A&L Goodbody’s Tax team. This insight was prepared with assistance by Darragh Noone (Senior Associate).