In accordance with the EU Anti-Tax Avoidance Directive (ATAD), Ireland has introduced the Interest Limitation Rules (ILR) as part of the Finance Act 2021.
The ILR applies to accounting periods that commence on or after 1st January 2022. Their aim is to limit base erosion attempts by multinational companies through the use of excessive deductions and other financing costs. To accomplish this, the ILR limits the rate of interest deductions.
The ILR seeks to limit the amount of allowable net borrowing costs to a maximum of 30% of the tax adjusted EBITDA.
The restriction apples where the interest equivalent expense exceeds interest equivalent income. The term “interest equivalent” has a wide definition and includes interest on all debt plus financial instruments, amounts incurred in connection with raising finance and foreign exchange gains and losses on interest.
As provided by the ATAD, the ILR may be applied using a single entity basis or a by using a “group approach”. This approach will determine the interest restriction at the level of a local group of companies, i.e., the “interest group”. The interest group will include all companies within the charge to Irish corporation tax. This approach should ensure that the profits of all members of the interest group that are liable for Irish tax are included.
The legislation includes a number of important exemptions, which include:
- Where the taxpayer’s (whether a standalone company or an interest group) net borrowing cost does not exceed €3m,
- Where the taxpayer is a standalone entity, i.e., no associated businesses,
- Long-term infrastructure projects,
- Interest on a legacy debt concluded before 17th June 2016.
Subject to conditions, amounts disallowed as a tax deduction under the ILR may be carried forward and deducted against profits in future years.
ILR will have a significant impact. Many corporate taxpayers will be faced with a complex set of rules and a greater administrative burden.
For more information, please contact Niall Grant, Partner in our Tax Services’ Department.