The EU Commission has an increasingly significant role in Irish tax affairs. The latest example of this may well be found in a recent Dutch Government announcement on the tax deductibility of Additional Tier 1 Capital (or Contingent Convertibles (CoCos) ) issued by banks and insurers.
Additional Tier 1 Capital is the name given to instruments which absorb losses when the capital of a bank or insurer declines below a certain level. They typically are structured as bonds, carrying a coupon, but with certain equity-like features. Due to their similarities with equity, the Dutch Government and a number of other EU Member States enacted measures to specifically provide for the tax deductibility of the coupon payments.
On 29 June 2018, the Dutch Government announced that the coupon on these specific bonds will not be tax deductible as of 1 January 2019. Although the decision is expressed to be in line with the Dutch Government's policy to ensure banks hold more "true" equity, it also notes that, by abolishing the measure, the state aid concerns raised by the European Commission will be met. This latter point is understood to be a reference to an ongoing EU Commission investigation into the tax treatment of Tier 1 instruments. The Commission's letters to the Dutch authorities express concerns that preserving tax deductions for coupon payments may provide preferential treatment to banks and insurance companies that raise state aid concerns. They also note that they have contacted other EU Member States in connection with this issue with a view to taking measures to address state aid concerns.
In an Irish context, the provisions of section 845C of the Taxes Consolidation Act 1997 provide that the coupon on Additional Tier 1 Instruments shall be regarded as interest, and therefore should be tax deductible. It will be interesting to see whether these provisions, or those in other EU Member States, adopt a similar position to the Dutch in light of the EU Commission's concerns.
CoCos not tax deductible anymore as from 1 January 2019