Ireland has transposed the EU Anti Tax Avoidance Directive (ATAD) into Irish law with the inclusion of, among other things, Interest Limitation Rules (ILR). The ILR applies to accounting periods beginning on or after January 1 2022.
The ILR seeks to link a taxpayer’s allowable net interest deductions directly to its level of earnings. It does this by limiting the maximum net deduction to 30% of earnings before deductions for net interest expense, depreciation and amortisation (EBITDA).
The importance of this restriction in the deployment of much-needed renewable energy infrastructure, which is by its nature a capital-intensive undertaking, cannot be understated. This is recognised both at an EU level and in Ireland. Therefore, among the potential exclusions within the legislation, there is one important consideration for renewable energy developers and operators: the exclusion for Long-Term Public Infrastructure Projects (LTPIP).
A long-term infrastructure project is defined in the ILR as a “project to provide, upgrade, operate or maintain a large-scale asset”. The exclusion operates to remove income and expenses associated with a qualifying project from the calculation of a relevant entity’s relevant profit or loss (and by extension its EBITDA). It also excludes exceeding borrowing costs on such a project from the scope of the ILR.
Four general conditions must be met for a project to treated as qualifying for the purpose of the LTPIP:
The project operator must be established in, and tax resident in a member state (the operator condition);
The large-scale asset must be in a member state (the asset condition);
The income arising from the long-term infrastructure project, and the deductible interest equivalent relating to that project, must arise in a member state (the income and expenses condition); and
The project is to provide, upgrade, operate, or maintain a large-scale asset with an expected useful life of 10 years (the expected life condition)
Types of assets within scope
The legislation defines large-scale assets as those that fall within specific planning rules and that have a minimum expected life span of 10 years. Two types of assets that are worth noting are explained below.
Seventh Schedule development
The first asset type of note is a development that falls under the Seventh Schedule of the Planning and Development Act 2000, as amended, where such a development has been approved by either:
An Bord Pleanála under section 37G on foot of an application made pursuant to section 37A (2)(a) or (b) of that Act, or
A local authority under section 170 of that Act.
This includes certain energy, transport, environmental and health care infrastructure). The Seventh Schedule outlines asset types including:
“An industrial installation for the production of electricity, steam or hot water with a heat output of 300 megawatts or more.
An installation for hydroelectric energy production with an output of 300 megawatts or more, or where the new or extended superficial area of water impounded would be 30 hectares or more, or where there would be a 30 per cent change in the maximum, minimum or mean flows in the main river channel.
An installation for the harnessing of wind power for energy production (a wind farm) with more than 50 turbines or having a total output greater than 100 megawatts.”
Renewable energy installation
The second asset type worth considering is an installation generating energy from renewable sources (within the meaning of the European Union (Renewable Energy) Regulations (S.I. No. 365 of 2020), which is regulated, either solely or jointly with another party, by the Commission for the Regulation of Utilities.
Advice for renewable energy companies
Those involved in the renewable energy market should consider their project’s planning status to confirm whether it constitutes a large-scale asset for the purpose of the LTPIP exclusion.
There is no specific definition as to what a ‘project operator’ is in the context of the exclusion. As noted above, this could extend to those who provide, upgrade, operate and maintain a large-scale asset. As such, the definition could extend beyond the asset owner to a wider cohort of businesses including various asset managers – and therefore, it should be considered more comprehensively.
With respect to the income and expenses condition, a question arises as to the concept of “income arising from the long-term public infrastructure project”. In the context of long-term projects spanning a number of years, subject to their size and scale it would not be uncommon for there to be no income arising in the first few years of operation.
It is this author’s understanding that the Irish tax and customs authority (Revenue) may not consider the lack of income in one particular year to be a reason for not applying the LTPIP exclusion. However, no formal confirmation of this has been forthcoming. This may become apparent in Revenue Guidance which should be published in the near future.
What may have seemed an obstacle for the renewable energy market, relating to tax-efficient project debt structuring, may not be so. It will be important for asset owners, and the sub-industry of service providers, to consider the impact of the LTPIP exclusion on their tax position.
Where the LTPIP can be accessed, it should make financial modelling easier and drive cost efficiencies in the market. This would make Ireland’s goal, that renewable energy should provide 80% of the country’s electricity by 2030, all the more achievable.
