Executive summary

Ireland's Department of Finance, on 21 November 2025, published a Feedback Statement on Phase One of the reform of Ireland's taxation regime for interest. The Phase One Feedback Statement follows the September 2024 consultation and the October 2025 Action Plan. Stakeholders are invited to provide responses to the Phase One Feedback Statement with the consultation period running for two months to 16 January 2026.

The Irish Department of Finance (the Department) is advancing a reform of Ireland's taxation regime for interest to ensure the tax system remains resilient, supports economic competitiveness, safeguards the tax base, and aligns with Ireland's international tax commitments. Recognizing the complexity of the area, the proposed reform seeks to carefully modernize the treatment of interest while avoiding unintended consequences.

Background

A prior public consultation process concerning the Irish tax treatment of interest was launched in September 2024, and the related feedback from key stakeholders highlighted the need for careful consideration of a wide range of issues and requested further detailed consultation before legislative changes are introduced.

In response to the feedback received, the Department published an Action Plan on 7 October 2025, outlining a phased approach to reform, and then on 21 November 2025 a Feedback Statement was published setting out key proposals for Phase One of the reform of Ireland's interest taxation regime. As part of the Action Plan, the Department also signaled other areas of potential reform in future phases including financial services transactions, targeted anti-avoidance measures regarding the taxation/deduction of interest income/expenses, and interest deductibility rules relating to Irish rental income and capital gains tax. (For background, see EY Global Tax Alerts, Irish Government publishes consultation on tax treatment of interest, dated 1 October 2024, and Ireland Budget 2026: An overview for international investors, dated 9 October 2025.)

In the press release accompanying the Feedback Statement, Minister for Finance Simon Harris stated that the proposed reform is to "help Ireland retain an attractive and internationally competitive taxation environment" and that it aims to "align Ireland's tax system with international best practice, and to provide administrative simplification and give greater certainty to Irish businesses."

Detailed discussion

The recently published Phase One Feedback Statement focuses on addressing the primary concerns raised by stakeholders as part of the prior public consultation process, with additional reforms to be considered in subsequent phases. The Phase One Feedback Statement contains a Strawman Proposal that aims to inform the design of the new interest taxation framework and provide stakeholders with an opportunity to comment on specific proposals prior to any legislative drafting.

The Strawman Proposal sets out a possible approach for how the underlying framework for the taxation and deductibility of interest may be reformed. The possible approach outlined is not intended to be definitive and, instead, is intended to help interested stakeholders conceptualize potential approaches and facilitate a concentrated discussion of the principal design questions. The Strawman Proposal focuses on several primary areas of reform, including:

• New interest deductibility rule for corporation tax
• Extending transfer pricing rules to medium-sized enterprises (but not small enterprises)
• Redesigning interest limitations rules
• Transitional provisions and simplification measures for "Section 247" borrowings
• Alignment of tax treatment between trading and passive interest income
• Taxation and deduction of interest equivalents
• Miscellaneous items

A high-level summary outlining the main proposals provided for under each key reform area is set out below.

New interest deductibility rule for corporation tax

The Strawman Proposal provides a new default interest deductibility rule for corporation tax be introduced for both borrowings relating to active (i.e., "trading") operations and passive (i.e., "non-trading") investment activities. Under the new proposed default rule, interest would be deductible only if the borrowed money is used with an intention to generate profits or gains that are, or would be, taxable (referred to as the "profit-motive test") under Irish tax law.

Interest expense would be matched to the type of income or gains that the related borrowings fund. For example, if borrowing supports a particular category of income under Irish tax law, the related interest expense is to be allocated to that category of income when computing deductions.

Although losses would largely follow existing rules, certain non-trading investment losses would benefit from enhanced carryforward treatment, making them more flexible under the proposed rules.

Extending transfer pricing rules to medium-sized enterprises

Under the proposal, Irish transfer pricing rules would be extended to medium-sized enterprises to act as a guardrail against potential anti-abuse or high-risk transactions that might otherwise fall outside of the scope of existing Irish transfer pricing rules.

Note that medium-sized enterprises are defined as enterprises that employ fewer than 250 persons and have an annual turnover not exceeding €50m, and/or an annual balance sheet total not exceeding €43m. These exclude small enterprises, which are defined as enterprises employing fewer than 50 persons and having an annual turnover and/or annual balance sheet total of €10m or less.

Redesigning interest limitation rules

It is proposed that the existing €3m entity-by-entity de minimis rule under Ireland's interest limitation rules (ILR) would be amended to specifically exclude exceeding borrowing costs of €3m from the application of the ILR provisions. A new de minimis threshold would be introduced to apply on an Irish group basis such that the aggregate exclusion for all Irish tax resident or permanent establishment members of a worldwide group (as defined under Irish tax law), cannot exceed €6m (regardless of whether the companies in a worldwide group have elected to be members of an Irish interest group).

The deadline for making an interest group election would be extended to two years after the end of the accounting period to which the election first relates (maintaining the existing rule that the election lasts for a period of at least three years).

Transitional provisions and simplification measures for "Section 247" borrowings

The Strawman Proposal would apply certain transitional provisions to situations in which the new deductibility rule applies to interest on existing loans that previously qualified for relief as a non-trade charge under Section 247 of the Irish tax code (Taxes Consolidation Act 1997).

Further, the "defray money applied" requirement and related conditions on flowing money between bank accounts under Section 247 of the Irish tax code would be simplified. And, the "common director" requirement (i.e., that the Irish investor company and the investee company have a common director on the respective Boards) would be removed from Section 247 of the Irish tax code.

Alignment of tax treatment between trading and passive interest income

It is proposed that passive (i.e., non-trading) interest income would be subject to Irish corporation tax (and income tax) on an accruals basis (as opposed to a receipts basis as provided for under existing Irish tax law).

The proposal states that "the new regime would introduce a unified approach to the taxation of interest income, applying equally to both Income Tax and Corporation Tax," and furthermore that it "would ensure consistency in how interest income is assessed across individual and corporate taxpayers and reduce complexity," as well as strengthen the "alignment of Irish tax calculations with financial reporting and the international regulatory framework."

Certain transitional provisions would provide for the proposed change from a receipts basis of assessment to an accruals basis of assessment to ensure that no unintended outcomes arise from a non-taxation or double taxation perspective.

It is furthermore proposed that, if foreign interest is taxed in Ireland before any related foreign tax is actually paid, Irish companies may amend an earlier Irish tax return to claim double tax relief once the foreign tax is actually suffered, subject to the standard four-year amendment window and any relevant double tax treaty requirements.

It is worth separately noting that, as part of the prior public consultation process, stakeholders had requested that passive income be taxed at the same rate as active (i.e., trading) income (i.e., tax all interest income at 12.5% rather than applying the 25% rate to passive interest income). However, the Department concluded that "this request from stakeholders is beyond the scope" of the current interest taxation reform efforts.

Taxation and deduction of interest equivalents

It is proposed that "income and expenses that are economically equivalent to interest income and interest expense, respectively, would have the same tax treatment as if that income or expense were interest for the purposes of the taxation of interest equivalents and the deductibility of interest equivalents under the new interest deductibility rule" (as discussed earlier).

Consistent with the broad interpretation of "interest equivalent" as conceptually envisaged under the relevant European Union (EU) Anti-Tax Avoidance Directive, the Strawman Proposal states that "[a]mounts considered economically equivalent to interest would include:

• Where securities are issued at a discount, that discount.
• Amounts under derivative instruments or hedging arrangements that are directly connected with raising finance.
• The portion of the profit or loss on financial assets or financial liabilities, the coupon or return on which primarily comprises interest, to the extent that it would be reasonable to consider that such an amount is economically equivalent to interest.
• Amounts arising directly in connection with raising finance, including guarantee fees, arrangement fees, and commitment fees.
• Foreign exchange gains and losses on interest or amounts economically equivalent to interest.
• Any amount arising from an arrangement, or part of an arrangement, which could be reasonably considered, where the arrangement is considered in the whole, to be economically equivalent to interest but not including any amount that is taxable or deductible under another provision of the Irish tax code (e.g., lease payments)."

Further, interest equivalent income or expense would not include any amount that is considered to be a distribution in accordance with any provision of the Irish tax code.

Miscellaneous items

Under the proposal, certain existing rules that treat intra-group interest payments as a (nondeductible) distribution be simplified to only apply if the interest concerned is not paid in the ordinary course of a trade and the lender is not resident in an EU or tax-treaty country.

Currently, the Irish tax code contains a narrow provision (Section 76E) that provides for an interest deduction for qualifying finance companies in respect of relevant loans. On the basis that the new proposed interest deductibility rule would be intended to cover Section 76E scenarios, it is proposed that Section 76E would no longer apply and that separate transitional provisions would be required for accrued but unpaid interest as relief under Section 76E applies on a paid basis.

Consultation period and next steps

The consultation period under the Phase One Feedback Statement will run for 2 months until Friday, 16 January 2026.

The next steps envisaged under the Phase One timeline are as follows:

Release of the Phase One Feedback Statement is a welcome development in efforts to reform the taxation regime for interest to help ensure that Ireland's tax system remains competitive, robust and aligned with international standards. Initial feedback includes calls for a more ambitious outcome from the Phase One Reform to achieve the stated objectives in the areas of competitiveness and simplification.

Affected entities should assess the potential impacts of these proposed reforms on their tax approaches and compliance processes and consider participating in the consultation to provide feedback on the proposed changes.