2021 and beyond: What's next for the Irish Alternatives sector?

2021 and beyond: What's next for the Irish
Alternatives sector?
29 March, 2021

The past few years have introduced significant legislative reform at domestic, EU and also at
an international level that has had a huge impact on the Irish Alternative Funds industry. This
change has been well documented in our previous series of releases. Here we look forward to
the year ahead, delving into the key areas that we believe will be significant for Ireland and
the industry as a whole.

Ireland's Corporation Tax Roadmap
In January 2021, the Irish Minister for Finance, Paschal Donohue, published an update to
Ireland's Corporation Tax Roadmap (the "Roadmap"). This is an update to the original 2018
publication and has the dual purpose of providing stakeholders with an overview of the
actions Ireland has taken to date but also gives an insight as to what we can expect to see in
the short to medium term to ensure the Irish corporation tax system remains competitive, fair
and sustainable. The consistent and transparent communication strategy regarding these
important policy matters is welcomed and it is good to see the same approach adopted to the
relevant implementing legislation.

What is evident from the Roadmap is that Ireland has embraced the necessary tax reform and
is fully committed to continuing to do so, whilst simultaneously reaffirming its commitment
to the 12.5% corporation tax rate. We have discussed some of the significant actions which
the Irish government have outlined within the Roadmap in further detail below and the
commitments of the Roadmap are positive. Notably, there are less revenue raising provisions
included within the 2021 Roadmap relative to the 2018 comparative. However, most
importantly, it provides alternative asset managers with a clear overview of the areas being
assessed and timelines for consideration of responses to any potential change. This signalling
affords managers a clear line of sight to assist with impact assessments, modelling
assumptions and broader future strategic planning initiatives.

Implementation of Interest Limitation Rules (ILR)
The Roadmap reinforces Ireland's commitment to implementing the provisions of the EU
Anti-Tax Avoidance Directive (ATAD). As mandated under ATAD I, it has been confirmed
that the ILR will be introduced as part of Finance Act 2021 later this year, with the rules
taking effect from 1 January 2022. These rules will aim to limit a taxpayer's 'exceeding
borrowing costs' (very broadly interest expense and interest expense equivalents less interest
income and interest income equivalents) to 30% of EBITDA. Understandably, this may have
a material impact on alternative fund structures that are heavily leveraged but focus on non-
debt related strategies.

The Department of Finance issued a feedback statement on the ILR on 23 December 2020
which sets out a two-stage approach to the transposition of the ILR. The first stage which is
covered by the recent initial feedback statement is intended to develop a robust legislative

approach to the operation of the ILR on a single company basis. The content includes sample
legislation addressing specific computational considerations and excess interest or interest
capacity carry forward provisions. The initial consultation process closed on 8 March 2021. It
is expected that the second phase will focus on the operation of the grouping provisions (both
domestic and consolidated financial statement) and the development of legislation to support
the transposition of these concepts. While there is no definitive timeline, the second feedback
statement is expected to be issued in mid 2021. Alternative asset managers with multiple Irish
structures or entities will be keeping a watchful eye on developments in this regard.

More generally, it is positive to note the emphasis on the policy intent stated in the feedback
statement which indicates that Ireland will not seek to gold-plate the ATAD I provisions as
they are transposed into domestic law. The feedback statement issued also indicates that a
pragmatic approach may be taken in a number of areas.

That said, the feedback statement does acknowledge the complexity of overlaying the ATAD
I provisions on top of what are already complex existing Irish rules. It is critical that the
complexity of the new regime does not cause undue administrative burden for taxpayers or
equally leave the regime difficult for Irish Revenue to police. While we are hopeful that
Ireland will introduce the ILR in a fair and business friendly manner that meets the minimum
standard of ATAD I, there is quite a way to go with respect to this process and inevitably, the
devil will be in the detail. Consequently, we expect significant engagement on this topic over
the remainder of 2021 and will be issuing a detailed ILR release once the provisions become
clearer.

Consultation on reverse hybrid mismatches
2020 saw the introduction of the Irish anti-hybrid rules which are aimed at arrangements that
exploit differences in the tax treatment of a financial instrument or entity under the laws of
two or more jurisdictions to generate a tax advantage. Further detail as set out in a previous
release can be found here.

As mandated by ATAD II, Ireland is required to implement its rules with respect to reverse
hybrid mismatches by 1 January 2022. Both the Roadmap and the ILR feedback statement
indicate that a consultation paper is to be published by the Department of Finance in the first
quarter of 2021, followed by a feedback statement in mid-2021 and final implementation of
the rules expected to be introduced as part of Finance Act 2021.

Potential territorial tax system?
Another significant point of note from the Roadmap was the acknowledgement by the
Department of Finance that a territorial tax regime may be considered for Ireland, bringing it
in line with the majority of other OECD members. A participation exemption or territorial
regime provides for an exemption from corporation tax on foreign dividends, foreign branch
profits or foreign capital gains derived as a result of holding certain investments, provided
certain qualifying conditions are met. It supports a territorial corporate tax base versus the
imposition of corporate tax on a worldwide tax basis which Ireland currently operates. Given
the changing international tax and business landscape referenced throughout this article,
international asset managers are now considering appropriate locations for their operations,

with a preference for onshore jurisdictions where they can match their management substance
with their asset owning entities.

It is important to note that, under the existing regime, in the majority of cases, foreign
dividend income is effectively exempt from Irish taxation through foreign tax credit relief.
The calculation of this relief however is very complex and burdensome to administer. It is
particularly difficult to manage with respect to joint ventures, non-controlled shareholdings
and income arising from multiple jurisdictions as the information required to compute the
foreign tax credit may not be available to the Irish taxpayer. This added complexity acts as a
disincentive for Ireland as a holding company location in certain cases for asset managers.

The introduction of a territorial tax system would further enhance the attractiveness of
Ireland's existing holding company regime and given the recent enhancements of the
Investment Limited Partnership (ILP), it is important for the Irish Alternative Funds industry
that an efficient repatriation mechanism exists to compliment the ILP structure.

The Roadmap affirms the Department of Finance's intention to hold a consultation on this
topic in 2021. Our expectation is that this is likely to occur later in 2021 with any legislative
reform likely to be in Finance Act 2022 as opposed to Finance Act 2021.

In future releases, we will take a deeper dive into the existing features of the Irish holding
company regime and outline its application to the Irish Alternative Funds industry.

Foreign entity classification
Foreign entity classification is an area with a myriad of differing approaches across different
tax heads and entity types from an Irish tax perspective. We have recently seen the updated
Interest and Royalties manual which notes the treatment of interest to certain foreign entities
from a withholding tax perspective. This is an area that was considered in detail at the time of
the introduction of the Irish anti-hybrid rules via Finance Act 2019. We understand that Irish
Revenue are looking at the area of foreign entity classifications more broadly again and will
likely engage on the topic in the months ahead. Overall, a simplification of the process for
dealing with foreign entity classifications would be welcome, as a holistic understanding of
the tax profile of a structure has never been more important. That said, due regard will need
to be given to precedent in this space and it will be difficult to achieve this in a manner that
does not adversely impact previous positions taken by taxpayers and agreed with by Irish
Revenue. Any departure from the status quo or existing treatment will need to be carefully
considered.

This will be a very significant area to monitor for the alternatives industry given the variety
of entities (both in terms of jurisdiction and legal form) that sit within a typical alternatives
investment platform.

Other EU or OECD areas to monitor
The EU list of non-cooperative jurisdictions ("the EU Blacklist")

The Roadmap notes that Ireland has introduced defensive measures within our CFC regime
for countries on the EU Blacklist. Interestingly, the Roadmap also notes that Ireland will

consider the appropriateness of additional defensive measures for countries on the EU
Blacklist, if necessary. As well as the CFC regime updates, taxpayers will have noted
enhanced disclosure requirements via DAC 6 reporting and corporation tax return disclosures
over the past number of years.

All of the above should be considered in conjunction with the fact that in January 2021, the
European Parliament adopted a joint ECON or FISC resolution on reforming the EU
Blacklist. The key takeaways from the resolution are a political "call for change", an updating
of listing criteria, a focus on fairness and transparency and a call for coordinated measures on
removing jurisdictions from the EU Blacklist. This is an area that will be watched closely.

Public Country-by-Country reporting ("pCbCR")

In February 2021, a majority of EU Member States expressed support for the compromise
text of a proposed Directive on pCbCR. The disclosure of certain tax information by
undertakings and branches is now supported by 15 EU Member States. The mandate was also
approved by EU Member State permanent representatives in the 'Coreper' meeting on 3
March 2021. The EU institutions will now start trilogue negotiations with a view to agreeing
on the legislative text over the next few months. The EU Member States likely will reach
agreement before the end of June 2021.

The aim of the Directive is to enhance corporate transparency by requiring multinational
enterprises with a total consolidated revenue of more than €750 million in each of the last two
consecutive financial years, whether headquartered in the EU or outside, to disclose publicly
in a specific report, the income tax they pay in each Member State. The report would be
different from the current CbC reports shared between tax administrations.

Although the transposition into EU Member States' domestic law could take another two
years, it is clear that pressure continues to build for large groups to be more transparent
around their tax strategies and make available information about the amount of tax they pay
and where. pCBCR will likely play a key role in making this the new norm. However, other
groups may be considering making their tax information public for environmental, social or
governance reasons in the short-medium term in any case.

While many alternative asset managers may not, prima facie, appear to be impacted by these
rules there will be certain cases where managers may meet the relevant thresholds. More
broadly, the increasing trend towards public disclosures may become more of a commercial
(as supposed to solely a tax) consideration in discussions with institutional investors. We
continue to see certain categories of investors place a significant focus on tax sustainability
and integrity (European pension funds, for example).

BEPS 2.0 and EU digital levy

BEPS 2.0, as outlined in this article, is another key tax measure being developed to deal with
the new digital business environment as the world moves on from the traditional 'brick and
mortar'-style economy. Since our initial article, detailed blueprints have been released by the
OECD in respect of Pillar 1 and Pillar 2 and a consultation period has been completed. It is
likely that political consensus will be sought on the blueprints by mid 2021. If political
consensus is achieved, it is likely that the Pillar 1 and Pillar 2 rules will move to a more
detailed design and implementation phase.

Meanwhile, the EU have also unilaterally commenced a consultation on their own EU digital
levy with the initial 'Inception Impact Assessment' closing on 11 February 2021 and the main
Public Consultation running until 12 April 2021. While the EU have acknowledged the
ongoing efforts of the OECD, this consultation process signals an intention to forge ahead
with an EU digital tax measure in the absence of a global consensus.

It is likely that the €750 million revenue thresholds referenced above in relation to pCbCR
will also apply in the context of BEPS 2.0. Furthermore, the blueprints also indicate that there
will be helpful carve-outs for the financial services sector from both a Pillar 1 and Pillar 2
perspective. However, there will be certain structures that may breach the revenue threshold
and may not fall within the proposed carve outs so this area should be monitored in the
second half of 2021, if this initiative moves to a detailed design and implementation phase.

We are here to help you
Clearly, there will be no reprieve for alternative managers in 2021 in terms of material
legislative reform. We hope that this article gives a taste of what is to come and provides
useful insight into what we believe to be the key areas which alternative managers will need
to monitor closely in both the short and medium term to safeguard the tax efficiency of their
investment platforms. The transparent and consultative approach taken by the Irish
Department of Finance is to be welcomed and while there will inevitably be material change
to contend with, the clear signalling does allow for strategic planning and early impact
assessment in most cases. As always, should you wish to discuss any of these topics in more
detail, in terms of the impact to your business, please do not hesitate to reach out to a member
of the team.