Tax and international investment in Irish PPP projects

Recent times have seen substantial changes to the way that international companies are taxed generally. Many of these changes have either been or soon will be implemented in Ireland. However, Ireland remains an attractive location in which to do business, due to the business-friendly environment created by Government, the clear guidance provided by the Irish tax authorities on the interpretation of these new tax rules, and the continuing low corporate tax rate applicable for businesses. 

In respect of the rules that apply to Public Private Partnership (PPP) projects, the Irish tax authorities have issued guidance on how income earned by participants in projects will be taxed and the deductibility rules for costs incurred.

Given the publication of the Ireland National Development Plan 2021-2030, it is anticipated that Revenue will update their guidance on the taxation of PPP projects and remove any uncertainties that have been encountered heretofore.

Below we outline some of the key considerations for international companies considering participating in PPP projects.

1. Tax rates

Ireland has four tax rates that could apply to income received from a PPP project:

2. Bid costs

Bidders can incur significant costs in preparing and submitting a bid. The Irish tax authorities recognise this and permit a tax deduction for successful and unsuccessful bid costs. Irish companies participating in a joint venture may want to claim a tax deduction for these costs at the earliest opportunity, whereas international companies with no other Irish operations will not be able to utilise these deductions from the outset and instead can only use them when the Irish JV company begins earning taxable profits.

The JV partners should agree from the outset how and when any tax deduction available for bid costs under Irish tax rules should be utilised. Consideration should be given to requiring any member who receives a tax benefit for losses/costs incurred by the JV company through consortium or other reliefs paying the JV company for those benefits.

International companies may want to consider what entity within their group incurs the bid costs in respect of the Irish PPP project. It may be more attractive for those companies to recognise these costs in their home jurisdiction if there is a tax advantage in doing so.

For solid commercial reasons, an international company might consider waiving the recharge of bid costs to the Irish JV company. Irish tax advice should be sought in advance of implementing any forgiveness or waiver, as depending on the circumstances giving rise to the waiver, different tax implications for all parties could arise.

3. Interest limitation rules (ILR)

Ireland has recently announced interest limitation rules to fully comply with ATAD. The new ILR limits the maximum tax deduction for net interest costs to 30% of EBITDA for companies within the scope of the legislation. The ILR does not apply to net borrowing costs below the €3m de minimis threshold set out in ATAD.

It is welcome that one of the exceptions to ILR is a carve-out for certain long-term infrastructure projects linked to NDP 2021-2030. The exclusion acts to remove from the exceeding borrowing costs any interest incurred in connection with such projects, and to exclude from the calculation of EBITDA any income/expenses arising directly from the project.

At the time of writing, the proposals are still being debated by parliament; they will become law by the end of 2021 and will apply from 1 January 2022. It is expected that the Irish tax authorities will issue comprehensive guidance on how these rules (including the exemption set out above) will be applied. This should provide certainty for international companies considering participating in Irish PPP projects.

4. Irish capital gains tax

Two rules in respect of capital gains tax are important for international companies in determining a potential exit strategy.

1. Non-resident persons (including companies) are generally not subject to Irish capital gains tax. However, where the assets being sold are Irish real estate or shares in an unquoted company that derives the greater part of its value from Irish real estate, the sale is subject to Irish capital gains tax.
2. Ireland has a participation exemption in respect of the sale of shares in trading companies. Again, the participation exemption will not apply where the shares in the company derive the greater part of their value from Irish real estate.

The current rate of capital gains tax is 33%. Therefore, should an international company consider an exit from its Irish operation during the lifetime of a project, it may need to factor in Irish capital gains tax.

An exit at the end of a project where real estate is no longer owned by an Irish JV should not result in any significant Irish tax issues on either the wind-up of the Irish company or an extraction of funds by way of dividends.

5. Payroll

Finally, if an international JV partner is considering relocating employees to Ireland or having mobile employees spending time in Ireland on an infrequent basis, they will need to carefully consider the tax implications of this as it pertains both to the employer obligation for the company and the personal tax impact for the individual. 

Typically, where an individual spends more than 183 days in Ireland in a calendar year, they will have obligations with respect to Irish tax. If the individual spends fewer than 183 days in a calendar year in Ireland, there would generally be some form of tax treaty relief available for them to avoid Irish taxes arising; however, the employer company may still have some obligations with respect to the administration of an Irish payroll on behalf of the employee. 

As a leading professional services firms in Ireland with over 80 years’ experience, Crowe can provide you with the reassurance and expert advice you require to maximise the return on your investment in Ireland. For additional information or help with any international tax or global mobility issues, please contact a member of our tax team.