Ireland Interest Deductibility Reform 2027

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Introduction

Following Budget 2027, attention turns to the next phase of proposed reforms aimed at simplifying Ireland’s complex interest deductibility rules and providing greater certainty for businesses.

Budget 2027 did not provide any details of the likely changes to Ireland’s interest deductibility rules. Minister Harris instead noted that work is continuing through the Department of Finance’s consultation process, with further detail potentially emerging during the passage of Finance (No.2) Bill 2026.

Ireland’s existing interest deductibility provisions are complex, particularly when considered alongside the Interest Limitation Rule (ILR). We welcome and call for a simpler, commercially grounded regime, with clearer interaction with the Interest Limitation Rule. This would reduce unnecessary complexity while supporting Ireland’s competitiveness and protecting the tax base.

The case for change

Ireland’s rules on the taxation of interest have developed over decades, with successive changes adding to their complexity. Taxpayers must navigate purpose-based deductibility provisions, tracing and structural conditions, and targeted anti-avoidance measures before considering how the Interest Limitation Rule (ILR) applies.

The Department of Finance has undertaken a multi-stage consultation process and published an Action Plan for the reform of Ireland’s taxation regime for interest. The consultations and issued draft legislation focus on simplifying the rules, providing greater certainty and better reflecting modern commercial financing practices.

For domestic businesses and multinational groups alike, financing arrangements that are straightforward from a commercial perspective can require extensive tax technical analysis and careful implementation under the current rules. The result can be increased compliance costs, protracted transaction planning and outcomes driven more by legal form and tracing requirements than by the economic purpose of the borrowing.

Why the current framework needs modernisation

The ILR has applied to accounting periods beginning on or after 1 January 2022. It generally limits the deduction of net borrowing costs by reference to 30% of tax-adjusted EBITDA, subject to exemptions and group-related provisions.

The ILR is intended to address excessive interest deductions and applies after deductibility has been established under domestic law. Businesses must therefore assess their financing arrangements under two sets of rules, adding to the administrative burden. The ILR also provides an additional safeguard that can be considered when reviewing the underlying domestic provisions.

Priorities for the next phase of reform

A simpler, principles-based deductibility test

A clearer test based on whether borrowing is incurred for business or profit-making purposes could reduce complexity arising from technical tracing and structural requirements, while retaining appropriate anti-avoidance protections. This approach was identified as a key principle in phase one of the Department of Finance’s Action Plan for reform.

Better alignment of trading and non-trading treatment

Different rules for trading and passive activities add complexity and can make tax outcomes dependent on classification. A more consistent approach to the treatment of interest income and expense across business and investment activities is also identified as a priority in phase one of the Action Plan.

Clear rules for modern financing arrangements

The legislation should expressly accommodate contemporary financing practices, including group cash pooling, shareholder and acquisition financing, capitalised interest and amounts economically equivalent to interest. Clear definitions and practical guidance would reduce uncertainty for businesses without weakening the integrity of the regime.

A more coherent interaction with the ILR

Closer alignment between domestic deductibility provisions and the ILR could remove unnecessary duplication, clarify the ordering of the rules and simplify the administration of elections, group provisions, interest capacity and carried-forward amounts.

Targeted reform of Sections 247 and 249 TCA 1997

These provisions can impose significant technical and administrative requirements, particularly for complex group financing arrangements. The additional safeguards now in place, including the ILR, CFC, and transfer pricing rules, provide a basis for reviewing these requirements, potentially through phased reform. Changes could better accommodate commercial financing arrangements and reduce the risk of relief being denied because of structural requirements or the movement of funds through intermediate entities. Other areas for consideration include borrowings initially used for non-qualifying purposes and extending relief for capital contributions used for qualifying purposes.

Certainty, commencement rules and practical guidance

Any new regime would require clear transitional provisions, appropriate protection for existing arrangements and sufficient lead time for implementation. Early Revenue guidance, worked examples and consultation on difficult interactions would help businesses apply the new rules in practice.

The next steps for reform

Reform should not be viewed as a choice between competitiveness and protecting the tax base. Ireland now has an extensive suite of international tax protections, including the ILR, anti-hybrid rules, CFC, transfer pricing provisions and the Pillar Two global minimum tax framework. Against that backdrop, it is reasonable to modernise older domestic provisions that can impose complexity beyond what is required to address the relevant risk.

A simpler regime would make Ireland easier to invest in. At the same time, a well-designed principles-based test, supported by targeted safeguards, would preserve protection against artificial or non-commercial deductions.

The Department of Finance’s consultation process, Action Plan and draft legislative proposals have established a basis for reform. Further detail on the legislative approach, including the sequencing of any changes and transitional arrangements, will help businesses assess the practical implications.

The next phase will determine how far the proposed reforms can simplify the existing rules, improve their interaction with the ILR and provide greater certainty for businesses.

We look forward to seeing what “targeted amendments” may be in Finance (No.2) Bill 2026 and the roadmap of what lies ahead.

About the authors

Marie Melody is a tax partner with over 20 years’ experience, advising Irish and multinational businesses on tax strategy, restructuring, M&A transactions, and international expansion. Thomas Donohoe is a tax director specialising in corporate tax, restructurings, transactions, Revenue audits, and international organisations across multiple sectors.