As the reformed coalition led by Fianna Fáil and Fine Gael eases into government, one topic high on the finance department agenda is likely to be the issue of reforms to Ireland’s legislation on tax deductibility of interest.
A backlash against the burdensome corporate tax on interest rules prompted the previous government to seek views from Irish corporations on how the regime might be simplified and streamlined.
‘A decades-long accumulation of stand-alone rules lacking a coherent policy rationale’
‘There’s far too much complexity,’ says Peter Reilly, tax policy leader at PWC Ireland. ‘To get a tax deduction you have to go through layers of rules.’
Last September, the department of finance launched a consultation following complaints over the complexity of Ireland’s tax code, which integrates recently introduced EU regulations, notably its 2016 anti-tax avoidance directive (ATAD), on top of national deductibility of interest rules. The consultation closed on 30 January; a departmental spokesperson told AB that the consultation had drawn a large volume of participants.
Simplification focus
Featuring 26 questions on potential reform options, the first section provides a broad overview of the current legislative provisions relating to interest, and asks for suggestions for potential simplification or enhancement measures, along with their potential benefits and adverse consequences in relation to:
- rules governing the taxation of interest income
- various interest deductibility provisions
- Ireland’s interest limitation rules
- specific rules for financial services transactions
- interest-withholding tax provisions
- reporting obligations
- various anti-avoidance provisions.
The second section focuses on a potential and more fundamental reform of Ireland’s interest deductibility regime, which could provide for deductions more widely in both a trading and non-trading context.
The questions asking for possible reforms of measures designed to counter tax avoidance include suggestions for closer alignment of rules regarding the taxation of trading and passive interest income – for example, from renting or investing.
Current conditions present significant difficulties for mergers and acquisitions
The consultation also asks if there are aspects of relief for interest as a trading expense that could be enhanced or simplified, including interest paid on borrowings for the provision of rental properties.
Investors spooked
Much of the consultation centres on potentially changing the Taxes Consolidation Act 1997, which governs interest deductibility, notably restricting deductibility of interest on loans related to acquisitions by intra-group companies.
In a statement at the time the consultation was issued, EY said that Ireland’s interest income taxation rules and the deductibility of interest expenses comprise a ‘decades-long accumulation of stand-alone rules lacking a coherent policy rationale’, and that the current conditions for interest deductibility often present significant difficulties for mergers and acquisitions.
‘This tangled web of rules is fiendishly difficult and costly for businesses’
In its 2025 Budget submission, Deloitte described interest deductibility as ‘one of the highest matters of significance for the financial services industry’, adding that ‘further simplicity’ would be welcome. KPMG, meanwhile, has been calling for such a review for several years.
Alignment issues
The Irish Tax Institute has described the complexity of Ireland’s deductibility regime as a ‘reputational risk’ that prevents investment and commercial activity, pointing out that Ireland has one of the most complicated interest deductibility regimes within the EU and arguing ‘compliance with this tangled web of rules is fiendishly difficult and costly for businesses’. It wants to see legislative reforms that will permit a ‘broad base’ for deduction of interest against both trading and non-trading income.
Interest limitation rules have been implemented under the ATAD, which applies an income-based deferral of interest deductibility to companies to tackle intra-group tax avoidance. It requires EU states to introduce a fixed-ratio rule that links a company’s allowable net interest deductions directly to its level of economic activity, based on taxable earnings before deducting net interest expense, depreciation and amortisation (EBITDA).
‘Frequently, clients are put off by the complexity and decide not to invest in Ireland’
Under Ireland’s Interest Limitation Rules (ILR), which came into force during 2022 to implement the directive, a company’s allowable tax deduction for net interest cost in a tax period is limited to 30% of EBIDTA. According to Deloitte, the ILR makes rules in the 1997 act relating to interest deductibility ‘superfluous’ and calls for their removal.
Ireland is also signatory to the OECD’s Global Anti-Base Erosion Rules, a 2021 agreement between 136 countries to move to a two-pillar approach to international tax reform. The addition of Pillar 2 rules – ensuring that large multinational enterprises pay a minimum level of tax on the income arising in each jurisdiction where they operate – now means that the whole system is ‘nearly unworkable’, says Reilly, who notes that, in the UK, there’s more certainty on the tax deductibility of interest.
‘In Ireland it’s much harder to tell a client with certainty that the deductibility will apply. I tell the client that it will probably apply but I have to do a lot of analysis,’ he says. ‘Frequently, they’re put off by the complexity and, ultimately, they decide not to invest in Ireland.’
Broader context
The Irish move should also be seen in the context of broader EU moves against what Brussels sees as a bias in favour of debt financing in European law. In May 2022, the European Commission proposed a debt-equity bias reduction allowance (DEBRA) to address the disparity between the tax deductibility of expenses related to debt versus equity. So far, no legislation has been passed on this, but the concepts are included in the Eurogroup’s statement on the future of Capital Markets Union.
Simplification ‘would significantly enhance Ireland’s reputation as a pro-business location’
In addition, Ireland must keep a close eye on US tax legislation, given the importance of American corporates to the economy; according to the American Chamber of Commerce Ireland, almost 970 US companies operate in the country. In 2023, Apple’s Irish arm enjoyed revenue of €204.39bn, while Google Ireland’s revenue hit €72.6bn.
A US 2017 Tax Cuts and Jobs Act enacted a new limitation on interest deductions for businesses in the US, for example. And with the incoming Trump administration expected to push US companies to locate more business in the country rather than in offshore locations such as Ireland, interest tax reforms will need handling with care.
The Irish Tax Institute notes that any simplification is a big project requiring significant resources for Revenue, but argues the case for this investment is compelling, saying ‘clear and simple corporation tax rules that are easy to operate and comply with would significantly enhance Ireland’s reputation as a pro-business location’.
