The Feedback Statement follows the earlier Action Plan for Reform of Ireland’s Taxation Regime, which identified key proposals for prioritisation by the Department of Finance throughout Phase One of the reform. We welcome this development, having long advocated for reform, including through our submission during the public consultation. We welcome also the commitment to implementation in Finance Bill 2026, with effect from the 1 January 2027.
Ireland’s current interest regime originated from the UK model, predating the UK Loan Relationship rules introduced in 1996. It works well for interest incurred for the purpose of a trade. For non-trading situations, however, it is a restrictive and complicated regime, containing many uncommercial requirements, traps for the unwary and cliff edges for loss of deductibility. Whilst these had some policy justification when introduced, the concerns that led to their introduction (avoidance, hybridity and excessive interest deductions) have subsequently been addressed by EU legislation. Reform is, therefore, very welcome.
The basic proposals are:
A “profit motive” test: Interest will be deductible where borrowings are used to fund activities or investments with a genuine intention to directly generate profits or gains within the charge to tax, or that would be within the charge but for a relieving provision, under Cases I–IV of Schedule D and Schedule F. The new interest deductibility rule would operate on an “intention” basis but would then be assessed each year. A deduction would only be allowed once funds are applied towards an activity or an investment undertaken, even if profits are not ultimately realised, provided there was a genuine intention to do so. Taxpayers may elect to apply Section 247 of the Taxes Consolidation Act 1997 (“TCA”) to interest on qualifying loans instead of the new interest deductibility rule. This election would be made on a loan-by-loan basis, regardless of the loan’s drawdown date, and would be irrevocable once exercised.
To move the taxation and deduction of non-trading interest (Cases III & IV) to an accruals basis of taxation and deduction.
To expand the definition of interest to align with Interest Limitation Rule (ILR) concept of “interest equivalent”. This will apply symmetrically to amounts payable and receivable. Aligning the current definition with that in the ILR, serves to centre the concept in its true economical/commercial meaning and to address the avoidance issues which Sections 812 – 815 TCA, are concerned with.
To extend transfer pricing rules to medium-sized enterprises.
To amend the ILR rules to introduce a group-level de minimis threshold of €6 million for Irish entities within a worldwide group.
To retain the current interest deductibility rules for holding companies and real estate.
Many of these changes are welcome, but there are a number of areas that we consider should be further reformed:
To introduce the ability to group relieve losses from financing activities. If this is not done, stranded losses will become more common which causes difficult interactions with Pillar Two.
Bring holding companies effectively into scope by permitting excess interest deductions to be surrendered within the group to offset against Irish taxable profits. If this is not done, Section 247 (with all of its issues) remains the only way for a normal holding company to deduct interest and offset it against profits of a subsidiary. In the absence of a consolidation system, this omission is disappointing. The ILR cap will continue to be the protection against excessive interest deductions in corporate groups.
Rather than merely aligning the computation rules, to merge Cases III and IV into a single “passive income” case. This eliminates the possibility that a company have a Case III loss and a Case IV profit (or vice versa). Businesses are largely unaware of the arcane distinctions between Cases III and IV.
Permit any interest on debt used to acquire a capital asset that is not otherwise deductible to be added to the base cost in that asset. This will avoid “tax nothings”.
Without these changes, in practice, we believe that holding companies will continue to utilise the existing overly complicated rules as excess interest deductions in a holding company will not otherwise be capable of surrender under the new regime. This is disappointing, as the regime would offer a finance company option but not a viable holding company option.
Overall, we welcome the proposals and will be making a submission identifying areas that could be improved upon and aligning with international tax policy. We will also be suggesting further areas for reform in later phases. For example, we have a concern that there may be too many layers introduced into the tests for deductibility and that the tests would fail to acknowledge the fungibility of money.
We encourage all stakeholders interested in the reform of the interest taxation regime to connect with our Tax Group regarding the next stages of Phase One of the reform process.
