On October 10, 2024, the Irish government published the Finance Bill 2024 (the “Bill”), which proposes to introduce two important amendments to Irish tax legislation that, when enacted, will positively impact Ireland’s private funds offering. The proposed amendments are:
- the extension of the value added tax (“VAT”) exemption for fund management supplies to all relevant Irish 1907 limited partnerships (“1907 LPs”); and
- the introduction of a foreign dividend participation exemption.
These two amendments will enhance Ireland’s appeal as a jurisdiction for private funds and in particular for private equity funds. Below is a brief overview of these two changes and the implications for private funds.
1. Extension of the VAT exemption for Fund Management Supplies to 1907 LPs
While regulated Irish UCITS and Alternative Investment Funds (“AIFs”) such as ICAVs, Irish investment limited partnerships (“ILPs”), common contractual funds and unit trusts are eligible for an exemption from VAT in respect of management services, unregulated structures such as 1907 LPs have not been eligible other than in certain circumstances¹. As a result, supplies of investment management to 1907 LPs created additional tax leakage because such supplies were standard rated for Irish VAT purposes, and this VAT cost could not be recovered by the 1907 LPs.
The Bill proposes to extend the VAT exemption for fund management supplies to all 1907 LPs, thereby reducing the VAT leakage of these structures and increasing their attractiveness as a structuring option when compared to regulated structures such as ILPs. This proposed amendment has been well-received by those in the Irish private funds industry, who increasingly see the 1907 LP being used as an investment vehicle due to its unregulated AIF status and flexibility.
2. Dividend Participation Exemption
Ireland currently operates a complex foreign tax credit system in respect of the taxation of foreign dividends and for relieving double taxation in respect of Irish holding companies. The Bill proposes to introduce an elective foreign dividend participation exemption, simplifying the process and strengthening the competitiveness of Ireland’s holding / investment company offering.
Under the existing global corporate tax framework, all profits, including foreign source dividends, are subject to Irish tax, with foreign tax credits available to offset the Irish tax liability. This system has been notably criticized for its complexity, and Ireland is the only country in the EU that operates such a system. It is materially more burdensome to operate administratively than a Luxembourg or UK equivalent, for example.
Under the proposed amendment qualifying foreign dividend and distribution income will be exempt from Irish corporation tax, provided certain conditions are met.
The exemption, which is not available to investment vehicles that qualify as section 110 companies, is expected to take effect from January 1, 2025, and can be claimed by election in the tax return for the relevant tax period.
In tandem with Ireland’s existing capital gains tax participation exemption on shares, the foreign dividend participation exemption is a welcome enhancement to Ireland’s offering for private assets, and this new regime will be particularly attractive for use by investment limited partnerships or 1907 LPs that require a blocker or asset holding company. Nevertheless, companies should carefully consider and structure their investments to maximize the benefits of the participation exemption for capital gains and, from January 1, 2025, foreign dividends.
Conclusion
The Bill is further evidence of Ireland’s proactive approach to maintaining its competitive edge as a global investment and private funds hub. Notably, the Bill is currently being fast-tracked through the Irish Parliament to allow a general election to be held by the end of November.
For further details and to discuss how these changes may impact your existing structures, please contact any of the authors below. For a related topic, please see our forthcoming newsflash regarding the Registration of Limited Partnerships and Business Names Bill 2024.
Contributors
The authors would like to thank Sean Hinds, trainee solicitor in Dublin, for his valuable contributions to this OnPoint.
Footnotes
- The Finance Act 2022 helpfully extended the exemption to AIFs (including 1907 LPs) managed by non-Irish AIFMs located in the European Union (“EU”), a revision that took effect from 1 January 2023. However, that change lead to an inconsistent treatment of Irish AIFMs managing 1907 LPs which were not exempt.
