831B Participation exemption for certain foreign distributions

Summary

Section 831B provides for a corporation tax exemption referred to as a “participation exemption”. The measure provides for a simplified method of double tax relief for qualifying foreign dividends and other types of distributions (referred to as a “relevant distribution”). The principal conditions are:

• the relevant distribution must be made by a “relevant subsidiary” in respect of its shares to a “parent company” on or after 1 January 2025,
• the parent company must be Irish resident, or resident for foreign tax purposes in an EEA state and not generally exempt from foreign tax,
• the relevant subsidiary must be a company that is resident for foreign tax purposes in a “relevant territory” and not generally exempt from foreign tax, both at the date the distribution is made and throughout the 5 year period prior to this date,
• the parent company must hold a “qualifying participation” in the relevant subsidiary, being a holding of at least 5 per cent of the ordinary share capital with regards to the ownership of ordinary shares and entitlement to profits on a distribution and a share of assets on a winding up,
• the qualifying participation must be held for a continuous period of at least 12 months,
• the relevant distribution must be made either (i) out of profits, or (ii) out of assets (where the underlying shares if sold would qualify for exemption under section 626B), of the relevant subsidiary,
• the relevant distribution cannot be deductible for foreign tax purposes, it must constitute income in the hands of the recipient and it cannot be interest or similar income from a debt claim,
• the parent company must otherwise be chargeable to corporation tax on the distribution under Case III of Schedule D, or under Case IV in the case of certain dividends from preference shares, and
• the parent company must claim the participation exemption in its tax return.

Foreign tax refers to a tax that corresponds to Irish corporation tax, that generally applies to income, profits and gains of a company and that is imposed at a nominal rate greater than zero per cent.

A relevant territory means an EU/EEA state or a jurisdiction with which Ireland has a double tax agreement that is not on the EU Code of Conduct Group list of non-cooperative jurisdictions.

The parent company can choose each year whether to claim the participation exemption in its annual tax return or to tax the income and claim relief under section 21B and/or Schedule 24, if applicable. A claim for the participation exemption will apply to all relevant distributions for the accounting period.

Details

Definitions

“EEA Agreement” means the Agreement on the European Economic Area signed at Oporto on 2 May 1992, as adjusted by all subsequent amendments to that Agreement.

“EEA state” means a state which is a contracting party to the EEA Agreement. This includes Member States of the European Union, Iceland, Liechtenstein and Norway.

“foreign tax”, in relation to a territory other than the State, means a tax which-

• is equivalent to Irish corporation tax,
• generally applies to income, profits and gains of a company that is tax resident in that territory, and
• is imposed at a nominal rate greater than zero per cent.

“listed territory” means a jurisdiction included in Annex 1 of the EU Code of Conduct’s list of non-cooperative jurisdictions for tax purposes (the ‘EU list’). This definition links to section 835YA, a provision relating to Controlled Foreign Company rules, which is amended annually to take account of updates made to the EU list during the year. The meaning is modified for the purposes of section 831B so that the EU list applies to distributions made on or after 1 January in a given year. In that regard references to ‘an accounting period beginning’ are be read as references to ‘the making of a distribution’.

“parent company”, in relation to a relevant subsidiary, means a company that holds a qualifying participation in the relevant subsidiary and-

• is Irish tax resident, or
• where it is not Irish tax resident -
• is resident for foreign tax purposes in an EEA state, and
• is not generally exempt from foreign tax.

“qualifying participation” is to be construed in accordance with subsection (2).

“reference period”, in relation to a relevant distribution, means the 5 year period immediately before the date the relevant distribution is made.

“relevant distribution” means a distribution, or part of a distribution, that-

• represents income in the hands of the recipient for corporation tax purposes, and
• is made by a relevant subsidiary in respect its share capital either out of the profits or out of the assets of the relevant subsidiary.
  In this definition, profits has the same meaning as in section 21B and refers to the amount of accounting profits after taxation. The profits are to be taken as those required to be presented to the company’s shareholders at its AGM, or where there is no requirement, the profits prepared in accordance with an accounting framework that is recognised where the company is incorporated as presenting a fair view of the profits of the period concerned.
  A distribution is made out assets of a company where that company bears the cost of the distribution. Distributions made out of assets are subject to an additional requirement as set out in subsection (5)(b).

The following amounts cannot be treated as a relevant distribution-

• a distribution, or that part of a distribution, that is deductible for tax purposes in any territory outside the State,
• a distribution in a winding up,
• any interest or other income from debt claims providing rights to participate in a company’s profits (profits has the same meaning as in section 21B),
• any amount considered to be interest equivalent (within the meaning of interest limitation rules in section 835AY), and
• any dividend paid or other distribution made by an offshore fund (offshore fund is construed in accordance with section 743).

“relevant period”, in relation to a relevant distribution means the period-

• beginning on the date that is 5 years immediately before the date the relevant distribution is made, or if the relevant subsidiary making the relevant distribution was incorporated or formed after that date, then the date the relevant subsidiary was incorporated or formed,
• until the date the relevant distribution is made.

“relevant subsidiary”, in relation to a relevant distribution, means a company that meets certain residence and company taxation conditions throughout the relevant period and at the date of making the relevant distribution.

• The company must be resident for foreign tax purposes and not generally exempt from foreign tax in the relevant territory, both on the date on which it makes the relevant distribution and throughout the relevant period. A company is not precluded from being a relevant subsidiary if it moves its tax residence from one relevant territory to another during the relevant period. The general taxation provision does not exclude a company which is generally subject to tax at the company level but which may avail of an exemption for certain sources of income (e.g. a company that avails of a participation exemption regime in another jurisdiction).
• This is an anti-avoidance provision that excludes companies that acquired the business or assets of another company in the 5 year period prior to making the distribution, where the other company is not resident in a relevant territory. It provides that a company cannot be a relevant subsidiary where, at any time during the reference period (which is the 5 year period preceding the date of the relevant distribution), the company acquired-
  • a business or part of a business, or
  • the assets or greater part of the assets used for the purposes of another business
  
  from another company that satisfies certain residence criteria.
  The other company must have been resident for foreign tax purposes in a relevant territory from the start of the reference period (or from the date the other company was incorporated or formed, if later) until the date the acquisition of the business or assets takes place.
• The is an anti-avoidance provision that excludes companies that merged with a company that is not resident in a relevant territory, during the 5 year period prior to making the distribution. It provides that a company cannot be a relevant subsidiary where, at any time during the reference period, the company was formed through a merger with another company that does meet certain residence criteria. The other company must have been resident for foreign tax purposes in a relevant territory from the start of the reference period (or from the date the other company was incorporated or formed, if later) until the date the merger takes place.

“relevant territory” means an EEA state other than the State, a territory with which Ireland has a double tax agreement in force, or a territory with which Ireland has signed a double tax treatment that has not yet come into force. It cannot, however, be a listed territory i.e. a territory on the EU list of non-cooperative jurisdictions for tax purposes.

Qualifying participation

(2) Subsection (2) sets out the three main criteria for establishing whether a company holds a qualifying participation in a relevant subsidiary.

(a) The company must have a minimum 5% direct or indirect holding of ordinary share capital in the relevant subsidiary, whereby it owns at least 5% of the ordinary share capital and is beneficially entitled to at least 5% of the profits, and if the company was wound up, at least 5% of the assets, available for distribution to equity holders of the relevant subsidiary.

(b) There are various rules that must be applied in order to determine whether the conditions in paragraph (a) are met.

• (b)(i) Provisions (2) – (10) of section 9 are applied in determining ownership of share capital, including shares held through intermediate companies.
• (b)(ii) A holding of ordinary share capital in a relevant subsidiary cannot be established by reference to share capital-
  • that is owned directly on a trading account of the holder so that a profit on a sale of the shares would be treated as a trading receipt of the holder’s trade, or
  • that is owned indirectly and is-
    • (A) held through an intermediary company that is not Irish tax resident or that is not resident for foreign tax purposes in a relevant territory, or
    • (B) is owned directly by another company on a trading account so that a profit on the sale of the shares would be treated as a trading receipt of that other company.
• (b)(iii) Sections 413 to 419 (which deals with company group relief) apply to ensure holdings are genuine and cannot be contrived.
  • Section 411(1)(c) is disregarded in so far as it relates to sections 413 to 419. The deletion of section 411(1)(c) means, inter alia, the different territorial scope and definition of a “relevant territory” for the purposes of section 411 do not apply to this section.
  • The meaning of “the relevant accounting period” in section 419(1), as applied in sections 414, 415 and 417, is modified so that it refers to the accounting period current at the time in question.

Exemption

(3) An exemption from corporation tax is available to a parent company where a relevant subsidiary makes a relevant distribution to that parent company in an accounting period.

The exemption applies where in an accounting period:

• (a) a relevant subsidiary makes a distribution to a parent company of the relevant subsidiary, and either the full distribution is a relevant distribution or part of the distribution is a relevant distribution, and
• (b) the parent company would (if this exemption did not apply) otherwise be chargeable to corporation tax on the relevant distribution under either:
  • (b)(i) Case III of Schedule D (i.e. income arising from possessions outside the State). A distribution that represents a Schedule D Case I trading receipt of the parent company is therefore not in scope of the exemption.
    The amount on which the parent company would be chargeable to corporation tax under Case III cannot be computed in accordance with the provisions applicable to Case I. This refers to circumstances where section 77(5) (relating to certain foreign trades) or section 110(2) applies. A company that is a section 110 company cannot avail of the participation exemption.
    or
  • (b)(ii) Case IV of Schedule D in accordance with section 138, which applies to dividends on certain preference shares.

Where the conditions listed above are met, and subject to subsections (5) to (8), corporation tax will not be chargeable on the relevant distribution. The exempt amount will not be taken into account in computing income of the parent company for corporation tax purposes. Any part of a distribution that does not qualify as a relevant distribution is not exempt.

The exemption will not apply where another provision of the Corporation Tax Acts takes precedence, for example, the general anti-avoidance rule (GAAR) in section 811C.

Single claim for double tax relief

(4) A parent company who avails of the participation exemption will not be entitled to any other form of tax relief for any tax paid in a relevant territory in respect of the exempted relevant distribution. This is in line with general principles of double tax relief, whereby relief for foreign tax cannot exceed any Irish tax due on the relevant income.

Minimum holding period

(5)(a) The parent company must hold the minimum 5% qualifying participation in the relevant subsidiary for a continuous period of at least 12 months in order for the exemption to apply. That period must include the date on which the relevant distribution is made by the relevant subsidiary to the parent company.

Where a distribution is made shortly after a 5% qualifying participation is acquired, the parent company may still claim the exemption provided the 12 month holding period is subsequently met and provided all other conditions for relief are satisfied.

Additional requirement for distributions made out of assets

(5)(b) An additional requirement is in place where the relevant distribution is made in respect of a relevant subsidiary’s share capital out of the assets of that relevant subsidiary. If the shares of the relevant subsidiary were disposed of by the parent company on the date the distribution is made, any chargeable gain on that disposal must be capable of qualifying for exemption under section 626B. Distributions out of assets are therefore subject to requirements set out in section 626B, which includes, for example, a trading test. This requirement does not apply to distributions to the extent that they are made out of profits of the relevant subsidiary.

Exclusions

(6)(a) The participation exemption does not apply to a relevant distribution made to life assurance companies where the distribution is instead taxed under the provisions of Chapter 1 and 3 of Part 26 (i.e. Old Basis Business provisions for life assurance companies). Any New Basis Business income taxable under Case I of Schedule D is also excluded by virtue of subsection (3)(b)(i). Any New Basis Business parent companies that have dividends taxable under Case III may be eligible for the participation exemption where the other qualifying conditions of this section are met.

(6)(b) The participation exemption does not apply to a relevant distribution made to a company that is an undertaking for collective investment within the meaning of section 738. Section 738 sets out the taxation regime for funds that were authorised before the gross-roll-up regime was introduced.

Targeted anti-avoidance rule

(7)(a) The benefits of the participation exemption will not be available where a relevant distribution arises in respect of an arrangement, or part of an arrangement, which—

• (a)(i) has been put in place for the main purpose of, or one of the main purposes of which is, obtaining a tax advantage, and
• (a)(ii) & (b) is not genuine having regard to all the facts and circumstances. An arrangement, or part of an arrangement, is regarded as not genuine to the extent that it is not put into place for valid commercial reasons which reflect economic reality.

Tax return claim

(8) The participation exemption will not apply unless the parent company makes a claim, referred to as a “relevant claim”, in the tax return (CT1) for the accounting period in which the relevant distribution is made by a relevant subsidiary.

A relevant claim applies to all relevant distributions made to the parent company in the accounting period by all relevant subsidiaries in respect of which that parent company holds a qualifying participation. Therefore, a claim for the participation exemption cannot be made on a dividend by dividend or subsidiary by subsidiary basis.

Relevant Date: Finance Act 2024