Contributed By Walkers
Withholding tax on payments of Irish source interest is the most significant tax issue to consider when issuing and/or listing debt securities. Ireland has a favourable tax regime which allows for the issuing/listing of debt securities to occur on a broadly tax neutral basis.
Irish withholding tax applies at the rate of 20% on the payment of yearly interest with an Irish source, eg, interest paid by an Irish resident company. However, a number of exemptions are available and debt securities may be structured by an Irish issuer in such a manner so as to remove an Irish withholding tax risk.
The quoted Eurobond exemption is frequently used in practice in respect of listed debt. A quoted Eurobond is a debt instrument that is issued by a company, carries a right to interest and is listed on a recognised stock exchange. A recognised stock exchange for these purposes includes Euronext and the GEM. There is no obligation to withhold tax on quoted Eurobonds where:
(i) either the quoted Eurobond is held in a recognised clearing system; or
(ii) the person who is the beneficial owner of the quoted Eurobond and who is beneficially entitled to the interest is not resident in Ireland and has made an appropriate written declaration to this effect to a relevant person (such as a paying agent located in Ireland).
A further exemption from withholding tax is available for interest payments on unlisted debt where the recipient of the interest payment is tax resident in an EU Member State (other than Ireland) or a country with which Ireland has a double tax treaty, provided the recipient is not acting through a branch or agency in Ireland. There is also a further exemption for certain debt instruments which mature within two years, provided certain conditions are met.
From a deductibility perspective, anti-avoidance rules must also be considered to ensure that the Irish issuer is entitled to a tax deduction for interest paid in respect of listed and unlisted debt securities.
In certain circumstances, Irish tax will be required to be withheld at the standard rate of income tax (currently 20%) from interest on a debt security, where such interest is collected or realised by a bank or encashment agent in Ireland on behalf of the security holder. However, there is an exemption from encashment tax where the beneficial owner of the interest is not resident in Ireland and has made a declaration to this effect in the prescribed form to the encashment agent or bank.