The long-awaited legislation for the introduction of a participation exemption for non-Irish dividends and distributions was included in the Irish Finance Bill 2024. Where the qualifying conditions are met, a company can elect to apply the exemption on distributions made on or after 1 January 2025. This is an optional regime; therefore, Ireland’s current ‘tax and credit’ system of rules will remain applicable to taxpayers not falling within the new regime, or for those who choose not to elect to avail of the new regime.

In practice a group will likely analyse its subsidiaries under the dividend participation exemption and the CGT participation exemption and then it would be indifferent to the format of a receipt from shares held by the Irish companies in the group.

Relevant subsidiary 

The new rules will apply to distributions made from a relevant subsidiary. A relevant subsidiary must be resident in an EU/EEA country, or a jurisdiction with which Ireland has a double tax treaty tax (excluding a territory that is on the EU list of non-cooperative tax jurisdictions) and it must not be generally exempt from the non-Irish tax.

These residency requirements must be fulfilled on the date the distribution is made and for five years prior to the distribution or since the subsidiary was incorporated or formed. It is hoped that the geographical scope will be expanded in the future so that no geographical limitations will apply for those companies within the scope of the Irish Pillar Two legislation. 

Relevant parent company and holding period

The payment of the distribution must be made to a relevant parent company. A relevant parent company is within the scope to Irish corporation tax (or if not resident in Ireland, resident in an EU/EEA jurisdiction and subject to a tax equivalent to Irish corporation tax and not be generally exempt from tax).  It must hold five per cent of the ordinary share capital of the relevant subsidiary or be beneficially entitled to not less than five per cent of the profits available for distribution to equity holders or beneficially entitled to not less than five per cent of the assets available to equity holders on a winding up.

The parent must satisfy the holding requirement for an uninterrupted period of at least twelve months. The ordinary share capital ownership requirement will not be met where the holding is through an intermediary that is not resident in a relevant territory.

Conditions relating to the distribution

The distribution must be treated as income of the recipient parent company for corporation tax purposes (taxable under Schedule D Case III TCA or Schedule D Case IV in respect of dividends paid on certain preference shares in accordance with Section 138 TCA ) and be made either out of the ‘P&L’ profits or out of the assets of the relevant subsidiary so long as the cost of the distribution falls on the relevant subsidiary, and the conditions for the capital gains tax exemption in Section 626B TCA are satisfied.

Several types of distributions are excluded such as one that is deductible for corporation tax purposes in the foreign subsidiary’s jurisdiction, any interest or other income from debt claims providing rights to participate in a company’s profits or any amount considered interest equivalent under interest limitation rules. Equally, the relief cannot be claimed if the distribution is made from an offshore fund. Broadly speaking, the relief cannot be claimed if the recipient company is a section 110 company, an assurance company, or an undertaking for collective investment.

If the conditions are met the relevant corporation tax that would otherwise be chargeable on the Irish parent company will not arise.

Filing and anti-avoidance

To avail of the new regime, the taxpayer must make a claim in its corporation tax return for the accounting period in which the relevant distribution is made, and the election will relate to all relevant distributions in that accounting period.

The legislation contains specific anti-avoidance for arrangements or parts of arrangements that are considered not genuine to the extent they were not put in place for valid commercial reasons which reflect economic reality. This mirrors the exemption in Irish law that implements the Parent/Subsidiary Directive.

This post was adapted from the discussion of the new exemption in the Arthur Cox Finance Bill 2024 briefing which also covers other highlights including an update on OECD Pillar Two. For further information on the exemption, please refer to this briefing.