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Ireland: ATAD implementation continues with the introduction of CFC rules and exit charge

Overview

On October 9 2018, Ireland's Minister for Finance, Public Expenditure and Reform Paschal Donohoe announced budget 2019. On October 18 2018, the draft legislation to implement the budget was published. In furtherance of Ireland's obligations under the EU Anti-Tax Avoidance Directive (ATAD), Donohoe announced the introduction of a new controlled foreign companies (CFC) regime and an ATAD-compliant exit charge. The exit charge took effect from October 10 2018 and the CFC rules will apply to accounting periods beginning on or after January 1 2019.

Introduction of CFC rules

Under the new CFC rules a company will be regarded as a CFC if: (a) it is not resident in Ireland; and (b) it is under the control of an Irish resident company (or companies). A CFC charge will only arise to the extent that:

  • The CFC has undistributed income; and
  • The CFC generates income by reference to activities carried on in Ireland.

Even if a CFC has undistributed income generated by reference to activities carried on in Ireland it will not automatically follow that a CFC charge will arise if the same arrangements in respect of the Irish activities would be entered into by parties acting at arm's length. Equally, no CFC charge will arise if:

  • The essential purpose of the arrangements is not to obtain a tax advantage;
  • The arrangements are subject to Irish transfer pricing rules; or
  • The arrangements are not non-genuine.

In cases where a CFC charge does arise, it must be calculated in accordance with transfer pricing principles and should reflect the amount that the CFC would have paid a third party for the Irish activities on which it relies to generate income. The amount upon which the charge is calculated is capped by reference to the undistributed income of the CFC.

The CFC charge is applied at the Irish corporation tax rates (12.5% to the extent the profits of the CFC are generated by trading activities and 25% in all other cases). Credit will be given for foreign tax paid by the CFC on its income and CFC charges imposed by other countries by reference to the profits of the CFC.

The draft legislation permits a one year period of grace for newly acquired foreign subsidiaries of Irish companies and contains a number of other exemptions including:

  • An effective tax rate exemption (if the tax paid by the CFC in its place of residence is more than half of the tax that would have been paid in Ireland had the CFC been Irish tax resident, no CFC charge will apply);
  • A low profit margin exemption (if the accounting profits of the CFC are less than 10% of the operating costs of the CFC, no CFC charge will apply); and
  • A low accounting profit exemption (if the accounting profits of the CFC are less than €75,000 ($86,000), no CFC charge will apply. Also, if the accounting profits of the CFC are less than €750,000 and less than €75,000 of those profits are generated from non-trading activities, no CFC charge will apply).

New ATAD-compliant exit charge

The exit charge was not anticipated to be introduced until January 1 2020 (as required by the ATAD) and the early implementation came as a surprise to many. However, the government considered that the early introduction of the charge provides certainty to businesses that are located in, or considering investing in, Ireland.

The exit tax is charged at 12.5% and applies to the unrealised capital gain inherent in assets where:

  • A company migrates its place of residence from Ireland to any other jurisdiction; or
  • Assets or a business of an Irish permanent establishment (PE) are allocated from the PE back to head office or to a PE in another jurisdiction. This limb of the charge only applies in respect of companies that are resident in an EU member state other than Ireland.

The exit charge does not apply to assets that remain within the Irish tax charge. The exit charge may be deferred and, in such circumstances, is payable in six instalments. If the exit charge is unpaid, Revenue may pursue any other Irish resident group company or a director who has a controlling interest in the company that is subject to the charge.

Comment and next steps

The Finance Bill, which will implement budget 2019, has been put before the Irish Parliament, where it may be subject to further amendment before it is enacted into law (which is expected to occur before the end of 2018). It is expected that the legislation will be supplemented by Revenue guidance in due course.

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