Ireland's implementation of the ATAD interest limitation rule 2021
Ireland’s implementation of the ATAD interest limitation rule 2021
The Department of Finance published a Feedback Statement in relation to the ATAD Interest Limitation rules (ILR) in December 2020. Ireland is expected implement the ILR in Finance Bill 2021, with the rules to take effect from 1 January 2022. The ILR are designed to limit the ability of companies to deduct net borrowing costs in a given year to a maximum of 30% of earnings before interest, tax, depreciation and amortization (EBITDA).
The Feedback Statement forms part of a public consultation process and stakeholders are invited to make submissions in respect of the approach set out in the 2020 Feedback Statement and particularly, any uncertainties or unintended consequences that might arise in respect of the proposals. This includes the opportunity to provide details of alternative approaches which might be beneficial. The current consultation period will run to 8 March 2021.
Under ATAD, the general deadline for implementation of the ILR was 1 January 2019. An extended deadline for transposition of 1 January 2024 was available where an EU Member State had existing domestic rules which were equally effective at preventing base erosion through excessive interest deductions.
Ireland took the view that existing rules aimed at the prevention of abuse of interest deductions were sufficient for these purposes. However, the European Commission disagreed and brought infringement proceedings in 2019 against Ireland for failure to implement this aspect of ATAD. On foot of this, a reasoned opinion (a formal request for compliance with EU law) was issued in November 2019 and the Irish government agreed to expedite the implementation of the ILR.
Given the complex nature of the ILR, the Feedback Statement envisages a two-step process:
Firstly the rules as they apply on a single company basis will be established. The 2020 Feedback Statement provides a broad indication of what this might look like. It provides for some suggested key definitions and exemptions.
Following the consideration of public submissions, the rules will be developed to deal with group company scenarios. It is expected that a second Feedback Statement will be published mid-way through 2021, which will contain draft legislation to include all aspects of the ILR, including group scenarios and all exemptions.
Broadly speaking, the approach set out in the 2020 Feedback statement provides that a taxpayer's ability to deduct "exceeding borrowing cost" will be limited to 30% of its EBITDA. Exceeding borrowing costs are the amount by which deductible borrowing costs (including interest, interest equivalent and arrangement fees) exceed taxable interest and interest equivalent income. The definition of interest equivalent will be a key concept in the operation of the ILR.
The possible exemptions to the ILR that Member States are permitted to implement and set out in the 2020 Feedback Statement are:
De minimis exemption – in order to reduce the administrative burden on smaller enterprises it is proposed to include a minimum threshold of €3m to the application of the ILR. This is the highest level permitted under ATAD and if implemented would mean that the ILR would only apply to interest deducted in excess of €3m. It is anticipated though that this will be applied across a group as a whole.
Standalone entities – given that abuse of interest deductions generally takes place between companies within a corporate group, ATAD permits an exemption in respect of standalone entities, i.e. those which do not form part of a corporate group and do not have any associated entities or a permanent establishment in another country.
Legacy debt – Member States are permitted to exempt interest deductions in respect of loan agreements which were concluded before the date of agreement of ATAD, 17 June 2016.
Public infrastructure projects – interest income and expenses associated with long-term public infrastructure can be treated as exempt as they do not present a material risk of abuse of interest deductions.
Financial undertakings – financial institutions and insurance undertakings have special features which would made the general application of the ILR problematic for their operations. ATAD permits that these types of entities be exempt from the ILR. The definition of financial undertaking proposed by the Department includes: credit institutions, insurance companies, UCITS and alternative investment funds, central counterparties, security depositories and investment firms, and closely follows the wording of ATAD. Member states that have sought to include additional categories have been subjected to infringement proceedings by the European Commission
For further information on this topic, please contact any member of the Tax team.