Strawman Proposal on the tax treatment of interest

The Department of Finance has released a Phase One Feedback Statement outlining a Strawman Proposal for reforming Ireland’s interest taxation framework. The publication marks the first structured step in a multi‑phase modernisation effort, following the public consultation that took place from September 2024 to January 2025. The aim is to simplify an increasingly complex landscape shaped by ATAD, anti‑hybrid rules, enhanced transfer pricing (TP) and the Pillar Two environment.

Key proposed changes

A new “Profit Motive” test for interest deductibility

The Strawman introduces a single deductibility rule: interest is deductible where borrowings are used for activities or investments undertaken “with the purpose of realising profits or gains.” The rule applies annually, requiring taxpayers to reassess the purpose of borrowing each period and allocate interest to the appropriate Case/Schedule.

Stakeholders have expressed concern that the test is uncertain, subjective and commercially unrealistic, particularly for strategic or long‑term investments. Replacing the long‑established “wholly and exclusively” rule with an intent‑based annual test may increase — not reduce — complexity.

Retention of Section 247 – with taxpayer election

The Department proposes retaining the existing Section 247 TCA 1997 rules, allowing taxpayers to elect into them for qualifying loans instead of using the new deductibility rule.

However, Section 247 and its linked Section 249 recovery‑of‑capital provisions remain complex, with conditions that are decades old and often misaligned with today’s anti‑avoidance framework. Revenue guidance highlights the density of rules and numerous edge cases.

Alignment of trading vs passive interest income

To achieve consistent treatment, the Strawman proposes moving passive Case III/IV interest income to an accruals basis, mirroring the treatment of trading income.

This move would align Ireland with international best practice, and the inclusion of a five‑year transitional period for existing arrangements is pragmatic, as it should help alleviate the initial cash‑tax burden.

Interest equivalents

Amounts economically similar to interest would be explicitly recognised as interest for both deductibility and Interest Limitation Rule (ILR) purposes. This improves consistency with EU rules. However, care will be needed to avoid inadvertently expanding withholding tax to non‑interest items.

Strengthening international guardrails

Proposals include:

• Removing the cliff edge where exceeding borrowing costs surpass the €3m de minimis.
• Introducing a new €6m ILR group‑level de minimis threshold, alongside the existing €3m entity‑level threshold.
• Extending transfer pricing documentation requirements to medium‑sized enterprises (≤250 employees, €50m turnover).

While removing the cliff edge would be a positive development, imposing a €6m group‑level de minimis would make Ireland’s ILR more restrictive than those of peer jurisdictions. Additionally, introducing TP documentation requirements would significantly increase the compliance burden on SMEs.

Practical impact on businesses

Corporate borrowing & treasury operations

• The proposed deductibility test requires annual documentation of the purpose of borrowings.
• Borrowings for strategic or long‑term initiatives (market entry, acquisitions, restructuring) may not satisfy a narrow “profit motive” test each period.
• Treasury teams should prepare for enhanced fund‑flow tracing, testing the purpose on “day one” and throughout the life of the loan.

Finance company structures

Existing structures relying on Section 247, Section 110, or bespoke on‑lending arrangements may face uncertainty regarding which regime to opt into. A modernised finance‑company regime would reduce dependency on these provisions, but the Strawman does not yet provide one.

SME compliance burden

Medium‑sized enterprises would be required to prepare full TP documentation for related‑party transactions, including financial transactions. This represents a material increase in compliance obligations and undermines the policy objective of simplification.

Key concerns raised by stakeholders

Replace the “profit motive” test

In the public consultation, many stakeholders requested a commercial motive test, which better reflects the realities of financing business activity and reduces subjective interpretation. Their main concern is non‑trading interest deductibility. Currently, the Section 247 regime is overly complex, Qualifying Financing Companies can only be used in limited circumstances, and the absence of a fit‑for‑purpose finance company regime forces reliance on Section 110 structures beyond their intended scope.

Retaining the well‑understood “wholly and exclusively” test for trading entities, with minor anti‑avoidance refinements, alongside a modern finance‑company regime, would provide greater certainty.

Improve loss‑relief symmetry

Allocating interest to Case III without group relief risks making the proposed regime less attractive to groups, potentially forcing them to continue using the complex Section 247 regime.

Protect competitiveness in the ILR

The proposed €6m group‑level threshold would be more restrictive than those in peer EU jurisdictions and could penalise groups with multiple Irish subsidiaries. General anti‑avoidance provisions already exist to combat artificial fragmentation.

Avoid burdening SMEs

Extending TP obligations to medium‑sized entities without proportionate simplifications risks imposing disproportionate compliance obligations. If implemented, consideration should be given to the introduction of safe harbours or documentation‑light rules to avoid unnecessarily burdening SMEs.

What businesses can do now

• Map all existing borrowings to assess how they may be tested under the Strawman’s profit‑motive rule.
• Review treasury policies for internal on‑lending, cash pooling and leverage allocation.
• Model cash‑tax impacts of moving to an accruals basis for non‑trading interest income.
• Medium‑sized enterprises should conduct a transfer pricing gap assessment for financial transactions.

Our view

The Strawman makes progress on alignment, coherence and modernisation, but its implementation approach risks additional complexity — particularly where subjective tests intersect with annual tracing requirements. Replacing the proposed “profit motive” test with an objective commercial motive standard, modernising the finance‑company regime and ensuring loss‑relief symmetry would substantially improve the regime’s competitiveness and certainty.

Ireland’s overarching objective should remain clear: simplification, not complication.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Forvis Mazars corporate tax team below: