Ireland consults on tax rules relating to interest limitation, hybrids

By Doug Connolly, MNE Tax

On July 2, the Irish Department of Finance opened for comment tax statements on the anti-reverse hybrid rule and interest limitation ratio rule.

The two rules, which will transpose requirements of the EU Anti–Tax Avoidance Directive (ATAD), are planned to be effective January 1, 2022.

The consultations on the hybrid rule and interest limitation rule are open for comment until August 2 and August 16, respectively.

Interest limitation ratio rule

The interest limitation ratio rule is intended to limit tax avoidance resulting from the use of excessive interest deductions. It imposes a fixed ratio that limits deductions for borrowing costs to 30% of a company’s earnings before tax and deductions for interest expense, depreciation, and amortization.

The interest limitation consultation builds on responses received to consultations issued in 2018 and 2020.

Under the approach proposed in the new consultation, interest limitation ratio adjustments would be calculated after an initial corporate tax calculation and the interest limitation ratio would be applied to the applicable tax computation. The consultation proposes a nine-step approach for applying the interest limitation ratio – from identifying the relevant entity to making calculations and applying adjustments.

The consultation asks for feedback on the proposed nine-step approach and on the definition of various terms used therein. It further seeks feedback on application of the interest limitation ratio to a “notional local group,” the interaction of the rule with existing legislation, and required reporting relating to the rule.

Anti-reverse hybrid rule

Anti-hybrid rules aim to address tax avoidance techniques that exploit differences in the tax treatment of an entity or instrument in different jurisdictions. Ireland introduced anti-hybrid rules in 2019.

The current consultation addresses a portion of the anti-hybrid rules, dealing with reverse hybrid mismatches, that were not included in the 2019 legislation. Reverse hybrid mismatches involve entities that are treated as transparent under the tax laws of the jurisdiction in which they are established but that are treated as taxable entities in the jurisdictions of some, or all, of their investors.

The consultation seeks input on several technical aspects relating to implementing the anti-reverse hybrid rule, including the framing of the rule and its scope, the definitions of “associated entities” and “reverse hybrid mismatch outcome,” and other issues. It also asks for comment on the definition of “collective investment vehicle” for purposes of the exclusion from the anti-reverse hybrid rule for such vehicles.