Ireland proposes participation exemption for foreign-sourced dividends

Monday, 18 September 2023
Ireland's finance minister has published plans for the introduction of a corporation tax participation exemption for foreign-sourced dividends with effect from 2025. The exemption will be included in Finance Bill 2024, following a technical consultation that is open until 13 December 2023.
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The Department of Finance is introducing the exemption because Ireland needs to ensure that its corporation tax code is ‘competitive and attractive to business investment while maintaining consistency with international best practices’.

The Irish Minister for Finance, Michael McGrath, noted that the global corporation tax landscape has undergone 'concentrated change' in recent years, largely arising from the OECD/G20 base erosion and profit shifting (BEPS) project. Ireland was one of almost 140 jurisdictions to sign up in October 2021 to the OECD BEPS two-pillar solution to address the tax challenges arising from the digitalisation of the economy.

'These reforms have resulted in the introduction of a range of new measures to the corporation tax code, to be joined in Finance Bill 2023 by extensive new legislation to implement Pillar Two of the OECD agreement', commented McGrath. This process is already under way, with initial scoping work on the potential for the introduction of territorial elements to the corporation tax system having commenced with the launch of a public consultation on a territorial system of taxation in December 2021.

However, Ireland currently does not operate some form of participation exemption for foreign dividends. Most EU and OECD Member States have adopted a limited territoriality in their corporate tax codes through this method of double-taxation relief for foreign taxation. It operates by exempting certain qualifying foreign dividend income received from corporation tax in the hands of the recipient. It typically extends to dividends from foreign direct investments and gains from disposals of such investments and is often complemented by an exemption for foreign branch profits.

'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', said McGrath. He added that the exemption will be a 'significant change to Irish corporation tax that will support Ireland's competitiveness in the years to come'.

A similar exemption for foreign branch profits is expected in the autumn 2024 finance Bill, although there is less certainty about this measure. Foreign branch exemptions are not as prevalent in other countries as dividend participation exemptions and have the potential for more interactions with other elements of the domestic tax regime, said McGrath. For this reason, he considers further examination of the potential benefits and consequential impacts of a branch exemption is needed before a decision is reached.


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