Angela Fleming, Partner & Head of Financial Services Tax, BDO: Reform of Ireland’s interest regime has been top of the wishlist for a number of years, in particular since the introduction of interest limitation rules in 2022. The need for reform is borne out of the fact that the existing regime contains vast restrictions on the availability of interest deductibility. The principle behind reform of the rules is to introduce a new regime that is best in class internationally, simplified, and with greater clarity for taxpayers. Unfortunately, the feedback statement published does not appear to have delivered on this promise.

The main issue with the proposed reform centres around the proposed new interest deductibility rule. In responses to previous consultations, calls were made for the introduction of a commercial business purpose test that would apply to all interest deductions regardless of the business activity supported by the borrowing and regardless of whether the borrowing is trade-related or not. However, the feedback statement outlines that detailed consideration was given to this proposal, but that further analysis of the terms “commercial” and “business purpose” indicated that these terms are open to different interpretations and may be construed very widely. Thus the strawman puts forward an alternative approach referred to as the “profit motive test”. The intention is to link the deduction of interest to the realisation of profits. While on the face of it this may seem a noble principle, digging into the details of the proposal it would appear to create a cumbersome requirement on taxpayers to look at both the intention and the actual application of funds, and to do so on an ongoing basis. Furthermore, linking to a profit motive, rather than commercial business purpose may mean that interest deductibility may be denied in situations where debt financing is applied for genuine business purposes.

That said it is greatly encouraging to see that the Department of Finance is considering substantially broadening the availability of interest deductions in non-trading situations. This is a necessary improvement to our current regime where deductibility for interest in non-trading situations is extremely limited.

It is clear that there has been a significant investment made by the Department of Finance to get to this point. Hopefully, with further engagement with businesses and their representatives, the next stage of the process will reflect a regime that is aligned with the stated objective of enhancing Ireland’s competitive offering by providing greater simplicity for taxpayers.

Paraic Burke, Head of Tax, PwC Ireland: The Strawman’s proposed new approach to the taxation and deductibility of interest does not strengthen Ireland’s competitive position relative to other international business locations. Nor does it significantly change the existing interest regime; instead, it risks adding further complexity and introducing new areas of uncertainty. Although the Minister’s stated aim is administrative simplification and greater certainty for Irish businesses, this objective does not appear to be achieved in the strawman, given how subjective and restrictive the proposed drafting is.

A move to assessing interest income under Schedule D Case III and Case IV on an accruals basis is likely to create difficulties for taxpayers, as they would have to account for tax before actually receiving the cash. The issue is acute for preliminary corporation tax, which may need to be paid on estimated interest accruals that have not yet arisen or been received. This is particularly harsh for investors funding start-ups via loans, where interest may not be payable for years; requiring preliminary tax in year one on interest potentially only receivable in five years seems unreasonable. ?

Under an accruals basis, foreign source interest income may be assessed under Case III and become chargeable to Irish tax before any corresponding foreign tax is paid. The suggested approach in the Strawman – claiming double tax relief in the accrual period by later amending the return once foreign tax is suffered – would require frequent return amendments, creating an unnecessary administrative burden and undermining the aim of simplifying the taxation of interest.

The proposed new interest deductibility rule, including the introduction of a “profit motive” test, does not simplify the basis for claiming an interest deduction. The interpretation of a “profit motive” test is subjective, with a very limited body of relevant case law or experience to rely on. It is likely to add very significant and unnecessary complexity to the interest regime as taxpayers, advisers and the Revenue begin to understand and consider how the Courts will interpret this new test. Annual testing of “intention” and evidencing “purpose” is likely to be onerous, adding complexity versus the status quo.

The proposed widening of the scope to include “interest equivalent” is a positive step from a Case III perspective. Nonetheless, it could be further enhanced by the introduction of a deduction for other operating costs associated with operating the company in question, subject to the well-established principles of Section 81 TCA 1997.

On balance, given the uncertainty that would likely accompany the implementation of most of the measures in the Strawman, retaining the status quo would be less damaging to Ireland’s competitiveness than adopting those measures.

Joe Walsh, Director, Financial Services Tax, Forvis Mazars: The proposal makes welcome progress in several areas. Moving non-trading interest income to an accruals basis aligns with international best practice and the inclusion of “interest equivalent” amounts to ensure consistency with interest limitation rules. A five-year transitional period for existing arrangements is also pragmatic. However, significant challenges remain.

The suggested “profit motive” test for deductibility is commercially unrealistic. Businesses often borrow for strategic reasons that do not immediately boost profits and tracking profit impact on a loan-by-loan basis would impose a heavy compliance burden. Retaining the well-understood “wholly and exclusively” test for trading entities, with minor anti-avoidance refinements, would provide greater certainty.

The main issue which the project should focus on is non-trading interest deductibility. Currently, the Section 247 regime is overly complex, Qualifying Financing Companies can only be used in limited circumstances and the absence of a fit-for-purpose finance company regime forces reliance on Section 110 structures beyond their intended scope. The Strawman proposal goes some way towards addressing these issues but does not fully address stakeholders’ primary concerns. The proposed “profit motive” test should be replaced with a “commercial motive” test as initially requested by stakeholders in the Interest Consultation held in early 2025. Additionally, the Strawman only contemplates minor updates to Case iii loss provisions to allow for the carry forward of losses; however, consideration should be given to extending loss relief under Case iii and iv to allow for relief against other income and group relief, as is currently available under the Section 247 regime.

Finally, extending transfer pricing documentation requirements to SMEs undermines the reform’s stated goal of simplification, imposing disproportionate compliance costs on smaller businesses.

While the Strawman addresses alignment and modernisation, its approach to deductibility and SME compliance needs to be rethought. Simplification, not additional complexity, should remain the guiding principle.

Deirdre Barnicle, Partner, McCann FitzGerald: A reform of Ireland’s complex taxation regime for interest would be welcome and is long overdue. However, while there are some welcome proposals for amendments in the strawman proposal contained in the Feedback Statement, some of the proposed amendments give rise to concern and, in many instances, will add even further complexity for taxpayers.

The suggestion that passive interest income should be subject to corporation tax and income tax on an accruals basis is certainly a positive development; the use of a receipts basis for non-trading interest created confusion and added complexity e.g. through addbacks and deductions.
However, the potential introduction of a ‘profit motive’ test is of significant concern. Under the new test, interest will be deductible only where money is borrowed for the purpose of generating profits/gains that would be subject to Irish tax. It had been hoped that a ‘commercial’ or ‘business purpose’ test would be introduced, which would have applied to all interest deductions irrespective of the business activity funded by the borrowing and regardless of whether the borrowing was trade related. The Department’s contention that the terms ‘commercial’ and ‘business purpose’ could be construed too widely is not convincing when one reviews the test’s existing application in a range of other OECD jurisdictions. This is especially so considering the interpretation difficulties that will arise from using ‘intention’ as the guide in the proposed test.

Not only is the ‘business purpose’ test the international norm, but it also aligns more closely with accounting principles and Pillar Two rules. The test would be centred on whether borrowing under Cases I or III served a bona fide commercial purpose for the company as a whole. Conversely, the ‘profit motive’ test will impose a large administrative burden on businesses by requiring forensic tracking of the application of all borrowed monies. This extra onus is particularly unnecessary when one considers protections against aggressive tax planning such as GAAR and anti-hybrid rules that are already in place. It is hoped that the Department will revise its plans and instead make proposals for the introduction of a ‘business purpose’ test as requested by key stakeholders.

This article appeared in the January 2026 edition of the Irish Tax Monitor.