Interest Deductibility in Ireland:
The “Strawman” Reform Proposal
The Department of Finance has released a “Strawman Proposal” as part of a significant
reform of the Irish tax treatment of interest. These proposals represent the first phase of a
broader move to modernise Ireland’s interest regime, which has historically been criticised
for its complexity and reliance on outdated legislative frameworks.
As this remains a consultation process, the following points are based on the potential
design of the new regime, which is intended for implementation in Finance Bill 2026 with a
projected effective date of 1 January 2027.
The “Profit Motive” Test
The core of the proposal is a new default interest deductibility rule based on a profit motive
test. Under this principle, interest would be deductible only if the underlying borrowings are
used with a genuine intention to generate profits or gains within the charge to Irish tax.
● Annual Assessment: Unlike the current “wholly and exclusively” model, the new
test may require an annual reassessment of the purpose of the borrowing.
● Intention-Based: A deduction would generally be allowed once funds are applied to
an activity, even if profits are not ultimately realised, provided the initial intention was
genuine.
Retention of Section 247 with Taxpayer Election
A significant development is the proposed retention of Section 247 TCA 1997 (interest relief
for acquiring a material interest in another company) alongside the new rules.
● Loan-by-Loan Election: Taxpayers would have the option to elect to apply the
existing Section 247 rules to specific qualifying loans instead of the new regime.
● Irrevocable Choice: This election is currently proposed to be made on a
loan-by-loan basis and would be irrevocable once exercised, providing a degree of
stability for complex acquisition financing.
Alignment of Trading vs Passive Income
The proposal aims to reduce the arcane distinctions between trading (Case I) and passive
(Case III/IV) interest income.
● Accruals Basis: It is proposed to move the taxation and deduction of non-trading
interest to an accruals basis, mirroring the current treatment of trading income.
● Loss Flexibility: While Case III loss relief rules would largely remain, the Strawman
suggests that non-trading losses that cannot be used in a period could be carried
forward more flexibly.
Practical Impact and SME Compliance
The practical impact for Irish businesses involves a trade-off between broader deductibility
and a heightened administrative burden.
● Documentation Requirements: Businesses will need to maintain clear records
demonstrating the “profit motive” link for every borrowing.
● SME Transfer Pricing: A key concern is the proposal to extend transfer pricing
documentation requirements to medium-sized enterprises (those with up to 250
employees). This represents a material increase in compliance costs for mid-market
businesses.
● Interest Equivalents: The definition of interest is set to expand to include “interest
equivalents” (such as arrangement fees and foreign exchange gains/losses on debt),
aligning it with the existing Interest Limitation Rules (ILR).
Key Concerns for Stakeholders
Professional bodies and stakeholders have highlighted several areas for further refinement:
● Subjectivity: The “intention-based” nature of the profit motive test may lead to
uncertainty without detailed Revenue guidance.
● Group Relief: There is a strong call to allow holding companies to surrender excess
interest deductions within a group, an omission in the current Strawman that could
lead to “stranded” tax losses.
● Layering of Rules: Concerns remain that the new rules will simply be added to
existing anti-avoidance measures (ILR, Anti-Hybrids, and Pillar Two), potentially
increasing rather than decreasing the complexity of tax law.
What Businesses Can Do
While the rules are not yet final, the direction of travel is clear. We recommend that
businesses:
1. Review Debt Portfolios: Identify which loans currently rely on Section 247 and
assess how they might fare under a “profit motive” test.
2. Audit Purpose Documentation: Ensure that the commercial rationale for all existing
and new debt is formally documented in board minutes and supporting files.
3. Monitor Finance Bill 2026: Stay informed as the consultation moves into its
legislative phase later this year.
Our View
The move towards a principled approach is welcome, particularly the effort to equalise the
treatment of trading and passive income. However, the introduction of an annual
intent-based test, coupled with the extension of transfer pricing for SMEs, could create a
significant compliance challenge for many businesses. For the reform to be a true success,
the final legislation must provide greater certainty for holding company structures and avoid
creating fresh layers of administrative complexity.
Contact ECOVIS Ireland
If you have any questions in relation to the Strawman Proposal on interest deductibility, or if
you require assistance reviewing your current financing arrangements and documentation,
please contact the ECOVIS Ireland team.
+353 1 8230000 
info@ecovis.ie 
www.ecovisireland.com
