State plans to exempt foreign dividends from tax in ‘exchequer-neutral’ move

Minister for Finance Michael McGrath said he plans to exempt from tax dividend income flowing into Irish companies from foreign subsidiaries from 2025, under a plan to ease the administrative burden on businesses as they grapple with wider changes to the international tax landscape.

Officials say that the move will be “exchequer-neutral” as the existing regime does not add to public coffers because the income is typically taxed elsewhere at higher rates and qualifies for tax relief in the Republic.

“Ireland is currently a significant outlier, being the only EU country and one of a very small number of OECD countries that does not operate some form of participation exemption scheme for foreign dividends,” the Department of Finance said in a paper published on Thursday as it put the proposal out to consultation.

[ Companies will face 'significant challenges' complying with 15% corporate tax rate ]

The paper said that the Republic’s implementation next year of internationally agreed new rules to introduce a minimum 15 per cent tax rate on companies with more than €750 million of annual revenue is likely to increase taxes incurred in other countries on income that would flow to Irish companies by way of dividends.

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The move acts upon the recommendation in a government-commissioned report, written in 2017 by economist Seamus Coffey, that there should be a tax exemption on foreign dividends as well as profits of overseas branches of Irish companies. Foreign direct investment companies in Ireland have long complained about the administrative burden attached to the existing “tax and credit” system that has applied in the State to overseas dividends, according to officials.

The Government is also considering introducing an exemption on profits of overseas branches of Irish companies, but this is not at as advanced a stage as the dividends plan because of the complexities involved.

Mr McGrath told reporters that his officials are at the drafting stage of the Finance Bill 2023, which will be published next month and pave the way for the introduction of the effective new 15 per cent rate next year. This will be levied by way of a top-up tax rate that will be added to the prevailing Irish 12.5 per cent headline corporate tax rate.

“It is going to be a very complex piece of legislative work,” he said. The planned tax exemption on foreign taxes are on track to be contained in a Finance Bill to be published late next year, following the unveiling of Budget 2025.

Meanwhile, Mr McGrath said that “Ireland remains deeply sceptical” about the European Commission’s recent proposal to harmonise corporate tax rules across the EU. It replaces the Commission’s previous common consolidated corporate tax base (CCCTB) proposals, which had been withdrawn due to lack of support by many member states.