Ireland 2022 budget’s tax changes include 15% corporate rate, new incentives

By Doug Connolly, MNE Tax

The Irish government announced in connection with Budget 2022, released October 12, a planned increase in the corporate tax rate to 15% in line with last week’s OECD tax agreement. The budget also includes expanded relief for start-up companies, a new tax credit for the digital gaming sector, and planned anti-tax avoidance rules on hybrids and interest limitations.

Regarding the OECD deal that Ireland joined just last week, Irish Finance Minister Paschal Donohoe said, “Due to our efforts, the minimum effective rate was set at 15 percent for large multinational companies. It could have been far higher. It could have been more uncertain. We avoided those risks. This is why it is in our interest to be in.”

Accordingly, Ireland will apply the new minimum effective rate of 15% as agreed in the October 8 OECD Inclusive Framework statement. Donohoe noted that the rate will still be less than many of Ireland’s “key competitors.” Ireland’s existing 12.5% corporate tax rate will continue to apply for businesses with revenues less than EUR 750 million (approximately USD 865 million), which are outside of the scope of the OECD deal.

With respect to transposing EU Anti-Tax Avoidance Directives, the budget includes a new interest limitation ratio and anti-reverse hybrid rules. The Irish government held consultations on these rules over the summer.

The interest limitation rule will limit deductible interest expense to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA). Companies will be able to carry forward disallowed interest to deduct in eligible future years. Certain exemptions, including a de minimis rule, will apply.

Under the anti-reverse hybrid rules, certain tax transparent (i.e., pass-through) entities such as partnerships will become liable for tax in Ireland when double non-taxation occurs due to hybridity resulting from the entity being 50% or more owned or controlled by entities resident in a jurisdiction that does not regard the entity as tax transparent.

On the incentive side, the budget extends for five additional years, through 2026, corporate tax relief for certain start-up companies under section 486C. In addition, the budget would expand this incentive such that eligible companies could benefit from the relief for up to their first five years, rather than just the current three.

With an aim to enhance Ireland’s competitiveness in the rapidly growing digital gaming industry, the budget also adds a new refundable corporate tax credit for expenditures on digital gaming design, production, and testing. The credit applies at a 32% rate up to a cap per project of EUR 25 million (approximately USD 28 million). The planned digital gaming tax credit would require EU state aid approval.