Withholding Taxes

Dividend withholding tax

Where an Irish resident company makes a distribution to certain persons including in particular Irish resident individuals the company is obliged to withhold 25% tax and pay it to the Revenue Commissioners. It applies where the recipient would be subject to Irish income tax on dividend income.

It applies to any distribution. This may include the distribution or transfer of assets. Accordingly the company must pay in cash 25% of the relevant value. The company is given statutory authority to recover this amount from the shareholder.

Where a shareholder receives a scrip dividend, being extra shares in lieu of a dividend, the company is obliged to reduce the additional shares issued by the withholding rate and pay the value of the withholding tax which would have been paid to Revenue Commissioners by way of dividend withholding tax.

General Exemptions

Distributions by Irish resident subsidiaries to Irish resident parents are exempt from dividend withholding tax and the requirement to make a return respect thereof. In this instance, a 50% subsidiary relationship is required.

An Irish resident company not in the above category usually qualifies for exemption. It may make a declaration to the company concerned or the relevant intermediary as to its eligibility.

Recipients, such as pension vehicles, collective investment vehicles, charities and certain exempt sporting organisations, shareholder owning trusts for employees, intermediaries and others entitled to an exemption may make a declaration as to their exemption to the company or to the relevant intermediary.

Non-Residents Exemptions

Generally non-Irish resident individuals who reside in an EU or double taxation agreement country, may declare their eligibility to be not liable on such basis. The same applies to other entities resident in the EU or double taxation agreement countries.

Non-resident companies which are ultimately directly or indirectly held by persons resident in the EU or double taxation agreement countries, are entitled to exemption which they must claim. Non-resident companies the principal class of whose shares or of its or those of its 75% parent, is rated on a recognise exchanging in the State the EU or in double taxation agreement country or qualifies for exemption.

Similar exemptions may be available under double taxation agreements, subject to their terms. In the case of this exemption the recipient/shareholder does not need to make a declaration, but details of the distribution must be made in the dividend withholding tax return by the company.

EU Parent Subsidiary Directive

Under the EU Parent Subsidiary directive, there is an exemption from dividend withholding tax for persons holding 5% of the share capital of the company concerned, where the parent is resident in an EU state.

The  EU Parent Subsidiary Directive removes the necessity to obtain advanced declaration from the recipient company which domestic legislation would otherwise require. Anti-avoidance provisions prevent the relief applying where the voting rights of the EU parent are controlled by non-EU residents or persons not resident in a double taxation agreement country. In these cases where the EU parent has been established predominantly for the purpose of avoidance of Irish tax, or the establishment is not supported by the commercial purposes, the relief is not available.

The anti-avoidance measures introduced in 2015 deny relief where the arrangement, an arrangement or series of arrangements have been put in place, the main purpose or one of the main purposes of which is to obtain a tax advantage that defeats the object of the Directive. Reference may be had to valid commercial reasons and the economic reality.

Finance Act 2023 ensures that dividend withholding tax (DWT) and the related income tax provisions operate in line with EU law. There are two aspects to this amendment:

• It ensures that persons resident in all European Economic Area (EEA) countries are treated equally, and
• It ensures that the way in which DWT applies to a pension fund located in a country with which Ireland has a Tax Information Exchange Agreement (TIEA) is no less favourable than how it applies to an equivalent Irish pension scheme.

Finance Act 2023 imposes a charge to Irish income tax in respect of all distributions made by Irish companies, other than where an exemption applies.There is an income tax exemption for the distributions to residents of EEA states and equivalent pension schemes in TIEA countries, to match the DWT exemptions.

 

Administration

Dividend withholding tax is 25% of the gross dividend. The return must be made to Revenue by the 14th day of the following month after the dividend was made. The obligation to make a return applies in most cases even though there are exemptions..

Particulars of dividends must be included in the annual corporation tax return. Companies must maintain records of dividend withholding tax declarations and records for at least six years

Where a dividend withholding declaration is required, it must be received by the company before the exemption can be allowed.

The recipient may be able to reclaim tax withheld if it was unable to claim exemption at all or in time. The company issues forms of proof of payment which can be used as the basis for reclaim. The proof of payment forms may also be used as the basis for income tax paid.

Interest Paid Abroad

The default position is that withholding tax at the standard rate of income tax must be retained and paid on yearly interest payments by companies any person to any person to a person whose usual place of abode is not in Ireland. Irish resident companies and Irish branches of nonresidents are regarded as having their abode in Ireland.

Yearly interest refers to a loan being capable of extending beyond a year. Therefore it applies to most interest payments. Short-term interest only is excluded. It does not apply to capital repayments.

Where the obligation applies, interest is paid with the corporation tax return. Preliminary tax would also arise. A specific return with information is required in part of the standard return. A form/ voucher must be given to the recipient as proof of deduction of the interest to allow claim credit were applicable.

Exceptions

Interest paid by a company resident in Ireland in the course of its trade to a company resident in an EU/DTA country subject to tax in that country on that income is exempt. Conditions apply. There may also be an exemption where the relevant tax treaty so provides or applies a zero rate of withholding tax .

The royalties and interest directive exempts from withholding tax interest and royalty payments made by a company to an associated company (25% voting control) resident in another EU state. This is not apply to interest and royalties paid to a company in connection with a trade carried on the state through its permanent establishment in the state.

Interest paid on a loan from a bank carrying out above fide banking business is not subject to the withholding obligation. The interest must be paid in Ireland. This will cover payments to Irish resident and foreign branches of banks in Ireland. Foreign branches of Irish resident branches are not paid in Ireland for this purpose.

Interest payable by financial institutions in the ordinary course of business is not subject to this particular interest withholding tax. Financial institutions are obliged to withhold deposit interest retention tax (DIRT) on interest payments to customers. Companies may qualify for exemption in which event interest is treated under the miscellaneous investment category. The bank pays it gross and the company accounts for interests in its corporation tax return.

Investment Vehicles

Interest paid to certain categories of collective investment undertaking are exempt.

Interest paid by certain co-called section 110 vehicles to persons resident in the EU or a DTA country save for interest paid to a non-resident carrying on a trade to a branch agency in Ireland.

Certain Section 110 companies qualify for interest deduction subject to conditions. The deduction for interest on loans linked to profitability or interest measured relative to a reasonable commercial return may be available. It must relate to Irish property and the recipient must resident in a DTA jurisdiction or the loan notes must be quoted subject to conditions.

Revenue may authorise payment of interest without deduction of tax. This may be available in exceptional circumstances where anomalies and injustice will arise by reason of the withholding obligation.

Interest paid to approved pension schemes is exempt from withholding. Interest paid in a close company that is deemed to be a dividend/distribution is not treated as interest for this purpose but is subject to the obligations applicable to dividend/distributions.

Royalties

Interest withholding tax obligations apply in respect of intellectual property royalties and annual payments in respect of the use of a patent. The withholding tax obligation does not apply to royalties paid by a company in the course of its trade to a company resident in a DTA country where it is taxed in the country in respect of that royalties.

There is an exemption for payments by an Irish resident company made in the course of trade in relation to a foreign patent in respect of an invention developed outside of Ireland to an entity not carrying on a trade in Ireland.

Payments of royalties to group companies is not subject to withholding tax.

Interest and royalties paid by a company to an associated company in another EU state are exempted under the interest and royalties directive. Association requires at least 25% control of the voting power in the company.

Rent

Rents payable to non-resident landlords are subject to withholding tax at 20%.