Following a long period of engagement between stakeholders and the Department of Finance, Finance Bill 2024 inserts a new section 831B into Irish Legislation which provides for a participation exemption regime for certain foreign dividends received by Irish companies on or after 1 January 2025. 

Under this new measure, Irish tax resident parent companies will be exempt from Irish corporation foreign dividends and other distributions received from EEA/Treaty resident companies, provided certain conditions are met.  

The introduction of the participation exemption will significantly reduce the administrative burden of Irish parent companies in the taxation of dividend income received from overseas companies. This change underscores Ireland’s commitment to simplifying the Irish Corporate Tax code, and bolsters Ireland’s competitive holding company regime which is an important component of the overall attractiveness of Ireland as a secure and efficient destination for international business and foreign direct investment.

We would like to see the definition of a “relevant subsidiary” extended in the future to include dividends or other distributions from non-EEA/Treaty resident companies. The Minister for Finance has expressed the possibility of an extension of the geographic scope of the dividend participation exemption regime, and it is therefore expected that further engagement between stakeholders and the Department of Finance will continue into 2025. It would be sensible for the exemption to be broadened in this respect as part of Finance Bill 2025.  

Key features of the Dividend Participation Exemption 

Election

Prior to Finance Bill 2024, Ireland operated a “tax and credit” system whereby foreign sourced dividend income received by an Irish tax resident company was in the first instance, subject to Irish Corporate Tax at the higher corporate tax rate of 25%, with various relieving measures of potential application to reduce or eliminate the tax payable (e.g. Section 21B to elect to tax certain qualifying dividends at 12.5%) on such dividends and/or to provide credit for foreign tax against Irish tax (e.g. Sch 24).  

The new participation exemption is an optional regime, and available upon election into the regime (on an accounting period by accounting period basis). Ireland’s current ‘tax and credit’ system therefore continues to remain in place following the introduction of the Participation Exemption, thus it will operate in tandem with the ‘tax and credit’ regime.  

If the election is made, all income receipts which meet the conditions to qualify for the Participation Exemption will be treated as exempt, while all income receipts that do not meet the conditions will continue to be taxed under the existing ‘tax and credit’ regime. Where the election is not made, all dividend income will continue to be taxed as before with the above ‘tax and credit’ approach applying to those receipts.

Conditions  

To qualify for participation exemption treatment in respect of a ‘relevant distribution’, a ‘parent company’ must have a relevant participation in a ‘relevant subsidiary.’ We have included a high-level summary of these definitions as follows;

• Parent Company - the recipient company (i.e. the parent company) must directly or indirectly (through an EEA / Treaty jurisdiction) own at least 5% of the subsidiary's ordinary share capital and be beneficially entitled to at least 5% of profits and assets. The dividend must be received within an uninterrupted period of 12 months or more during which it has owned the required percentage shareholding in the ‘relevant subsidiary’.
• Relevant Subsidiary - the company making the distribution (i.e. the subsidiary) must be resident in a relevant foreign territory (i.e. EEA/Treaty jurisdiction), and must be subject to a foreign tax that generally applies to income, profits and gains which corresponds to Irish corporation tax. The subsidiary cannot be generally exempt from foreign tax in that territory, while it must have been considered tax resident in that jurisdiction since incorporation or for a period of at least 5 years prior to the making of the distribution (whichever is the shorter).  
• Relevant Distribution - a relevant distribution is a distribution made, either “out of profits” or “out of assets” on or after 1 January 2025, that constitutes income in the hands of the parent company and is taxable income for Irish tax purposes.  

Exclusions

The legislation specifically excludes the following from the definition of a “relevant distribution”:

• A distribution that is deductible for corporation tax purposes in the foreign subsidiary's tax jurisdiction.
• A distribution made on a winding up.
• Any interest or other income from debt claims providing rights to participate in a company’s profits.
• An interest equivalent as per the Interest Limitation Rules or,
• A distribution that originates from an offshore fund.

Broadly speaking, the relief cannot be claimed if the recipient company is a qualifying section 110 company under Irish legislation.

The exemption will not apply to arrangements specifically put in place primarily to obtain a tax advantage and that are not genuine (i.e., arrangements that are not put in place for valid commercial reasons).  

Practical issues from 1 January 2025  

From 1 January 2025, Irish Corporate taxpayers in receipt of dividends from EEA/Treaty resident companies should consider whether or not to elect for Participation Exemption treatment or rely on the existing “tax and credit’ regime.  

If you wish to discuss any aspect of the new rules please reach out to your RSM Ireland contact.