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July 15, 2021

Irelandís Department of Finance opens consultation on EU ATAD Interest Limitation Rule and Anti-Reverse Hybrid Rule effective 1 January 2022

Executive summary

The second Feedback Statement on the transposition of the Anti-Tax Avoidance Directive(ATAD) interest limitation rule (ILR) and the Feedback Statement on the ATAD II2 Anti-Reverse Hybrid Rule (ARHR) were published by Ireland’s Department of Finance on 2 July 2021. The ILR and the ARHR will be legislated for in Finance Act 2021 and will come into effect from 1 January 2022.

Key stakeholders have an opportunity to provide input and raise any issues with Irish Revenue regarding the development and operation of these measures by engaging and providing feedback to the ILR and the ARHR Feedback Statements by 16 August 2021 and 3 August 2021 respectively.

Detailed discussion

ATAD interest limitation rule – Second Feedback Statement

The ILR is a fixed ratio rule that seeks to link a taxpayer’s allowable net borrowing costs directly to its level of earnings, by limiting the maximum net deduction to 30% of earnings before tax and before deductions for net interest expense, depreciation and amortization (EBITDA).

EY welcomes the ongoing engagement. This second Feedback Statement builds on the structured feedback and clarity resulting from stakeholder responses to the November 2018 public consultation (EY submission can be accessed here) and the stakeholder responses to the first ATAD Interest Limitation Feedback Statement (EY submission can be accessed here).

This second Feedback Statement responds to key stakeholder observations and provides indicative draft legislation on the intended computational mechanism for the ILR, including all group elements and exclusion options.

In particular, as provided by ATAD, Ireland intends to apply the ILR using a “group approach” (i.e., computing the restriction at the level of a local group of companies (an “interest group”) as defined under Irish law). The group approach to ILR will apply notwithstanding that Ireland does not allow tax consolidation (each company in a group is a separate taxpayer, and losses may be claimed/surrendered using “group relief”). The second Feedback Statement contains completely new material on this group approach. Stakeholders are invited to provide comments on the outlined computational mechanism for applying the ILR on an “interest group” basis. Consideration will also have to be given to the operability of “disregarding transactions” between members of an “interest group” and how administrable these new rules will be.

To ensure the seamless operation of existing profit-based interest restrictions, stakeholders are also asked to comment on the approach being considered when the ILR interacts with existing restrictions on interest deductions, such as interest incurred in connection with the provision of intangible assets.

The complexity of the ILR rules are noted in the Feedback Statement and the views of stakeholders are important in ensuring that, when introduced, Ireland’s ILR will be clearly understood, avoid unintended consequences and be operable in practice, while also meeting the standards set by ATAD.

Anti-Reverse Hybrid Rule

A reverse hybrid mismatch arises where an entity, referred to as a reverse hybrid entity, is treated as tax transparent in the territory in which it is established but is treated as a separate taxable person by some, or all, of its investors such that some, or all, of its income goes untaxed. Article 9a (1) of ATAD II sets out the rule to address reverse hybrid mismatches. It provides that where, one or more associated investors regard the hybrid entity as a taxable person then the hybrid entity shall be regarded as a resident of the Member State in which it is established and taxed on its income to the extent that the income is not otherwise taxed under the laws of the Member State or any other territory.

By way of example, if an Irish partnership is checked to be regarded as a corporate for US tax purposes, the general effect of the rule, is that Ireland will tax the partnership as if it were a company (subject to the exclusion for collective investment vehicles). It is also worth noting that the ATAD II does not provide for a secondary rule, to address the situation where Ireland as the investor country considers an entity as a corporate, but the country of establishment treats it as transparent.

The Feedback Statement sets out possible approaches to some of the technical aspects of the reverse hybrid mismatch rule, such as the application of the rule to “associated entities,” the purpose of the rule in terms of only addressing mismatches that arise as a consequence of hybridity and the definition of reverse hybrid mismatch outcomes. The mechanics of the charge to tax where the reverse hybrid mismatch rule applies and how the reverse hybrid mismatch rule interacts with double tax treaty provisions are also considered.

The affirmative use of reverse hybrid entities is very uncommon in Ireland and therefore much of the legislative focus is on guarding against any unintended consequences.

Next Steps

To assist stakeholders in focusing their responses to the second ATAD ILR Feedback Statement, the Irish Department of Finance is providing stakeholders with the opportunity to join a consultation discussion on 19 July 2021, to clarify any aspects of the second Feedback Statement. Officials from the Department of Finance and the Office of the Revenue Commissioners will address stakeholders’ queries.

EY will continue to actively participate in this ongoing dialogue with regard to the ILR and the ARHR. We are available to discuss the shape of the proposed rules with affected taxpayers. We will be participating in the ILR consultation discussion and making written submissions to the Feedback Statements.


For additional information with respect to this Alert, please contact the following:

Ernst & Young (Ireland), Dublin

Ernst & Young (Ireland), Financial Services, Dublin

Ernst & Young (Ireland), Cork

Ernst & Young (Ireland), Limerick

Ernst & Young (Ireland), Waterford

Ernst & Young (Ireland), Galway

Ernst & Young LLP (United States), Irish Tax Desk, New York

Ernst & Young LLP (United States), Irish Tax Desk, San Jose

Ernst & Young LLP (United States), FSO Irish Tax Desk, New York



  1. Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.
  2. Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries.

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