Irish Department of Finance publishes Feedback Statement for phase one of reform of Ireland’s taxation regime for interest

Introduction and background

In September 2024, a public consultation on the tax treatment of interest in Ireland was opened, with responses due by the end of January 2025. Following this consultation, an Action Plan for the reform of Ireland’s taxation regime was published by the Irish Department of Finance on 7 October 2025. Due to the complex nature of the taxation of interest, including but not limited to Ireland’s EU commitments and the sheer volume of relevant legislation, the reform is to take place in phases, with phase one addressing some of the primary concerns raised during the consultation.

The phase one Feedback Statement

The phase one Feedback Statement outlines a strawman proposal with a potential approach as to how the framework underpinning Ireland’s taxation of interest may be reformed. The purpose of this proposal is to float ideas and prompt conversation, and should not be taken as the definitive approach that will be taken going forward. The key topics considered in same are:

• New interest deductibility rules for corporation tax, including the introduction of a ‘profit motive’ test for interest deductibility, and consideration of the interaction of the new interest deductibility test with existing legislative provisions such as interest as a non-trade charge and loss/group relief.
• Addressing identified gaps in the effectiveness of the ‘international guardrails’.
• Alignment of tax treatment between trading and passive interest income.
• The application of the new interest deductibility rule to ‘interest equivalents’.

New interest deductibility rules

Profit motive rule

At this time, no restriction generally applies to deductions for arm’s length interest incurred wholly and exclusively for the purposes of a company’s trade outside of the Interest Limitation Rules (“ILR”) which applies across the EU member states. During the public consultation, the idea of a ‘commercial business test’ has been raised which would apply to all interest deductions, disregarding the business activity funding the borrowing or whether the borrowings related to trading or non-trading activities. The Department of Finance, on review considered this to be too broad a term to include in legislation and has instead proposed a ‘profit motive test’.

The idea of the ‘profit motive test’ is to allow for deduction of interest where a company has borrowed funds and applied these funds to an activity or an investment with the express purpose of generating income or gains which are within the charge to tax (even where a relieving provision applies). This should represent a significant simplification allowing for easier to calculate deductions and potentially streamline the corporation tax compliance process for interest rich companies.

Interest on a case-by-case basis and interaction with existing rules

During the initial consultation period, it was also flagged by stakeholders that there does not appear to be a clear rationale for the approaches to taxation under the different tax categories. In the case of trading and professional income, interest is taxed on a net basis, however for passive income the gross basis typically applies. While the Department of Finance notes that these differences have arisen due to the more general differentiation between trading and non-trading income, it has proposed that all interest be taxed on the net basis going forward, with a deduction allowed for interest expenses on funds onward lent to generate passive income. However, it also notes that these may lead to significant amounts of corporation tax losses so has given consideration as to how such losses could be absorbed.

Consideration is also being given to Ireland’s interest as a charge regime, including recovery of capital rules. The Strawman proposal notes that the repeal of these rules would limit taxpayer flexibility to use interest expenses in the same manner as non-trade charges. Including in the proposal are the following:

• Interest expenses deductible under the new interest deductibility rule would be allocated to a set taxation category based on the income generated from the investment or activities supported by the borrowings is classified.
• The existing loss rules in respect of the various categories would continue to apply. This means that losses associated with passive income which are generated by interest deductions exceeding income may only be carried forward for use against income of the same category in future periods without the opportunity to surrender such losses by way of group relief. By way of exception, an amendment is proposed to the loss rules in the case of foreign income to allow all such losses to be carried forward to offset against future foreign income rather than just losses relating to foreign trades (as is currently the position).
• The legislative rules in relation to interest as a charge would be retained without amendment, except for the changes outlined below, on an election basis. This would allow a company to continue to avail of the flexibility of relief for interest as non-trade charge where the requirements of the legislation are met. The election would apply on a loan-by-loan basis and would be an irrevocable election in respect of each loan.
• Utilisation of interest as a charge would be simplified for taxpayers by the removal of the common director requirement and the removal of the requirement to flow money through the bank account of intermediate group entities, where funds are used by connected companies.

The above proposal appears to be striking a balance between simplification and a certain level of maintaining the status quo to provide stability and certainty on a go-forward basis, particularly around interest as a charge rules. The necessity to have shared directors in situ has often presented issues, especially where companies are based in different jurisdictions, so the proposed removal of this requirement will likely to come as a relief to multinational groups. Additionally, the restriction of losses carried forward to a specific category should prevent policymakers having to put complex anti-avoidance provisions in place, which is always welcome news.

Additionally, it is proposed that rules in relation to interest paid by a company to a related entity be simplified such that only interest that is not paid in the ordinary course of business to a related company which is not resident in an EU member state or a country which has agreed a double tax treaty with Ireland would be considered a distribution, and the option to elect to have same treated as interest would be removed. This change would simplify the corporation tax compliance process significantly.

Addressing identified gaps in the effectiveness of the ‘international guardrails’.

Transfer pricing

The strawman proposal notes that currently SMEs are excluded from the transfer pricing rules which came into force on 1 January 2020. While the legislation is in place allowing for a simpler version of the transfer pricing rules to apply to SMEs, it is subject to commencement order which has not been made at this time.

Ireland is one of very few countries to allow this exclusion and it is recognises that it may allow for high risk transactions between related companies to fall outside of the transfer pricing regime. For this reason, it is proposed that transfer pricing rules will apply to medium enterprises (ie entities employing between 50 and 250 people with annual turnover between €10m and €50m and annual balance sheet between €10m and €43m) going forward to help ensure these transactions are captured.

Interest Limitation Rule

The ILR caps the amount of interest that taxpayers are entitled to deduct in a tax year, specifically to net borrowing costs only up to 30% of their EBITDA, (ie their earnings before interests, taxes, depreciation and amortisation), with any balance over this amount considered exceeding borrowing costs. Ireland allows companies to exclude exceeding borrowing costs up to €3 million on a per company basis, reducing the compliance burdens for Irish companies. Under these rules, where the €3m threshold is exceeded, then all of the exceeding borrowing costs of the company are subject to the limitation rather than just the amount in excess of €3 million. This has been viewed as punitive by taxpayers since the ILR’s introduction and also encourages debt to be spread across group members to avoid the imposition of the ILR.

To address both these concerns, it is proposed that the de minimis exemption be increased to €6m on a group level for the Irish member companies of a group in addition to the €3m per company and that where the exemption is breached at a company level, only the amount over €3m would be subject to the ILR. Additionally, it is proposed that the timeframe to elect to be in an interest group be extended to two years after the end of the accounting period to which it relates, rather than by the corporation tax return filing date for that period under the current rules.

Alignment of tax treatment between trading and passive interest income.

It was noted by respondents to the initial consultation that the differing treatment between the taxation of trading and passive interest income creates a level of complexity in the compliance process. Specifically, trading income has historically been taxed on the accruals basis, in line with accounting standards, whereas passive income is taxed on a receipts basis. To address this, it is proposed that all interest income be taxed on the accruals basis, removing the need for shadow accounts monitoring payment dates across accounting periods and complex addbacks and deductions in corporation tax calculations.

The application of the new interest deductibility rule to ‘interest equivalents’

Due to the increased complexity of transactions, it is reasonable to say that there a number of income and expense types which have come into being that, while not interest, are economically equivalent to interest but are not subject to the same tax treatment as interest. During the initial consultation, it was requested that a deduction be made available for expenses that are economically equivalent to interest expenses, the primary example being expenses incurred in the course of raising finance for business purposes. To address this, it is proposed that certain income and expenses that are economically equivalent to interest would be subject to the same treatment as interest under the new regime. 

Consultation period and beyond

The consultation period in respect of the phase one Feedback Statement will run until 16 January 2026. Following this, it is expected that draft legislation will be published for further comment in April 2026 with responses due the following month. Amended legislation following the consultation period on the draft legislation is likely to be included in Finance Bill 2026.

Conclusion

Ireland is coming to a place where reform is needed in order to maintain its competitiveness on the international stage. While it is understood that tax must be levied, where the process of calculating and paying tax is complex, this can be seen as a disincentive to locate in a particular jurisdiction. As such, any measures to simplify any area of the tax code, particularly one as important as interest, is welcome. The strawman proposal contains some positive steps forward and it will be interesting to see how many of these make it into the draft legislation.

Anyone may respond to the Feedback Statement. Where you have an industry body in place, engagement with same with regards to your comments is a worthwhile endeavour as it is more likely that the Irish government will engage with comments from an industry body speaking for numerous stakeholders over a single respondent. Additionally, if you have any comments you would like Eversheds Sutherland to feed into our industry body’s responses, please contact your Eversheds Sutherland contact and we will be happy to engage with you further on this.