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Fundamental changes in the taxation of financial services ushered in in Finance Act ‘23
As if the roll-out of change springing from the OECD’S BEPS process were not enough to disturb the status quo for financial services industry tax, a series of not unrelated developments are happening in parallel, a number of them springing from the Finance Act, enacted in late December. One of these are changes in the approach of Revenue to the taxation of aircraft leasing, and members of the Panel in this month’s issue address these. The Roundtable shows that the scope of change is wider than aircraft leasing, and indeed leasing companies in general; it encompasses the application of interest deductibility rules and the new concept of ‘qualifying finance companies’ introduced in the Act. The Roundtable also provides overviews in other key and linked areas, such as the introduction of new ‘qualifying finance companies’, the implications of a move to a territorial tax system, and reverberations in the areas of investment (for example ETFs, which are treated unfavourably for Irish-resident investors). Other issues coming into scope will be the definition of ‘trading’ in Irish tax law, which has implications for funds, insurance and the tax treatment of many other Irish corporate structures.structures.

Aviation leasing companies operating in Ireland are currently being advised to conduct a root and branch review of the implications of Finance (No.2) Act 2023 for their businesses.

The reasons are evident from a reading of Deloitte’s Marine Opperman’s contribution in this month’s Round Table, in which she says the large driver for some of the changes to existing law through Finance (No.2) Act 2023 follows confirmation from Irish Revenue that they were essentially terminating all of their historic leasing practices at the end of 2023. “A significant implication flowing from this is how lessors determine their trading status for the purposes of qualifying for the Case I 12.5% corporate tax rate”, she says.

Ted O’Byrne, Tax Consultant at Maples Group, describes the changes to aircraft leasing tax underway as being a combination of new legislation, and Revenue practice.

“Traditionally, Irish aviation lessors would seek to obtain the benefits of Ireland’s 12.5% trading tax rate. Trading presupposes there is some activity conducted in Ireland and a trading model involves employees, office space and key economic decisions and actions being located in Ireland. However, one of the features of aviation, is the use of “special purpose vehicles” which would only undertake a small number of functions. There are companies which may hold a single aircraft on lease, or which would be used to provide funding to other group companies. Such structures are common to facilitate bank lending and isolate risk. Historically, Irish Revenue would accept that each such entity was trading, provided it was part of an active trading group. However there has been a gradual change in approach from Irish Revenue. The trading status of such entities must now be much more closely scrutinised with the role of entity, it’s resources and activity levels being judged on a standalone basis. If there is not sufficient activity then the entity will not be trading. It will be taxed under Ireland’s less favourable corporate tax rules for passive income and taxed at 25%”, he says.

What is to be taxed, and not just the rate of course is central to corporate tax planning and structuring, and the changes in Finance Act 2023, and promised down the road from the roll-out of BEPS and Ireland’s own tax reforming agenda, to incorporate the introduction of elements of a territorial tax system are addressed.
Interest deductibility rules and the entities in scope for tax are key to this, and writing on this BDO’s Angela Fleming comments that “in his Budget Day speech, the Minister for Finance announced his commitment to engaging with stakeholders in the period ahead on Ireland’s current regime for interest deductibility, noting its complexity”. More recently, the Minister for Finance indicated that while the review will commence this year, it will require a significant body of work over potentially a multi-year timeframe, she says.

The Roundtable also includes a number of questions broadly pertaining to the ongoing consideration by the Department of Finance on moves towards a territorial tax system in Ireland, and on which a Public Consultation closed in December (in respect to “the Introduction of a Participation Exemption to Irish Corporation Tax”), referred to by Peter McGeoghegan, of Grant Thornton.

The Participation Exemption, he points out, “is a relief which has helped to attract and retain financial trading business in Ireland and is important to the banking and insurance sectors. In practice, it is one of very few relieving provisions relevant to financial/securities trading businesses operating in Ireland and has allowed several banks, insurance companies and other financial institutions to create or enhance their operations in Ireland”.

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