Contributing Firms:
Participation Exemption - UK model?
A number of respondents to the consultation highlighted the UK’s legislative framework for participation exemptions and foreign branch profits exemptions, which was implemented in 2009, as a good model from which to develop Ireland’s legislation. Please discuss, with reference to elements that could be adopted and as well as areas the prospective Irish regime should/will need to deviate from the UK’s model?

Emma Greene, Assistant Manager, Corporation Tax, Deloitte: A move to a full territorial regime for dividends and branch profits would be a positive change to Ireland’s tax code, enhancing Ireland’s attractiveness as a location for companies and moving Ireland more in line with other EU Member States. Currently the double tax regime is complicated and outdated and work is actively progressing developing a participation exemption for dividends, with a further public consultation expected to be launched in the next six weeks. The proposed participation exemption regime for distributions should be broad, simple, and optional in light of additional complexities as a result of Pillar Two.
Emma Greene
Emma Greene

Similar to the UK foreign rules, Irish resident companies should have the option to elect under an exemption regime or maintain the current double tax credit regime. Schedule 24 TCA 1997 should be retained with certain simplifications around broadening the categories of income on which relief may be obtained and changes to the measures for pooling and carrying forward unrelieved foreign tax. Taxpayers wishing to elect for an exemption regime could do so possibly through indicating such on their annual Form CT1.

Where an election is made, the profits and losses of an Irish company’s permanent establishments or dividend income would be exempt from Irish corporation tax, as allowed for under the UK regime.

To simplify the process, the election should not be permanent but rather applying to a specific accounting period. The election process needs to be simple and not subject to time restrictions. This would allow the taxpayer to amend their corporation tax return within the provisions of Section 959V TCA 1997.

An election on a company-by-company basis, rather than a group basis, should apply to the Irish regime, as is the case in the UK, so that an election in a group company will not impact the group overall.

The UK foreign branch exemption regime provides a blueprint on which Ireland can build its dividend participation and foreign branch exemption with necessary modifications. It is important that the rules allow flexibility for taxpayers.

This article appeared in the March 2024 edition of the Irish Tax Monitor.