The Finance Bill is the draft legislation to enact changes announced in last week's Budget and other new material.
Key new international tax features that arise are as follows:
Irish incorporated but non-Irish resident companies (INIRs)
The draft legislation requires that INIRs will be deemed to be Irish tax resident where they would otherwise be regarded as stateless. This ability of a company to be regarded as stateless is tightly defined to mean that it only applies to companies centrally managed and controlled in an EU member state or country with which Ireland has a double tax treaty (DTT) and which otherwise would be regarded as resident in that country if incorporated there.
The change is targeted primarily at Irish incorporated companies of US multinationals that are managed and controlled from the US. It may unavoidably hit certain INIRs and each structure needs review. In the interests of maintaining a stable and certain tax system for multinationals, the restriction on use of INIRs is limited and provides a 15 month window for the companies (that is, those incorporated before October 24 2013) affected by the change to rearrange their affairs. The OECD base erosion and profit shifting (BEPS) initiative may, in time and in conjunction with discussions with treaty partners, lead to further limitations on the use of INIRs.
Not surprisingly, the change means that Irish incorporated companies that are dual resident but non-Irish tax resident by reason of the tie-breaker under Ireland's DTT network are unaffected.
Ireland as a holding company location
Unlike many other OECD members, Ireland does not have a participation exemption for dividend income in respect of shares in subsidiaries and other strategic corporate investments. A company tax resident in Ireland is liable to Irish tax on dividend income from its participation in its foreign subsidiaries and other significant corporate investments but is entitled to extensive onshore pooling of foreign tax credits. The generous nature of the foreign tax credit regime means that with appropriate planning, the incidence of Irish tax payable on such income can be eliminated. The Finance Bill restricts the use of foreign tax credits to create a tax loss that may reduce or eliminate Irish corporation tax. The change applies for accounting periods commencing on or after January 1 2014. It is not clear if the implication of the proposed change in law means that the Revenue is accepting an interpretation adopted by companies and their advisers that the claims were validly made.
Some Irish parent companies and Irish sub-holding companies have sought to exploit the use of excess foreign tax credits to claim tax losses. It is understood that the Irish Revenue may have challenged certain claims. For the avoidance of doubt, the draft legislation makes it clear that foreign tax credits may not create a tax loss.
Ireland as a finance or intellectual property corporate location
A company tax resident in Ireland is liable to Irish tax on its worldwide trading income. This can include interest and royalty income. Extensive provision exists for credit pooling of withholding tax not otherwise treaty relieved. The generous nature of the foreign tax credit regime means that with appropriate planning, the incidence of Irish tax payable on such income can be eliminated. The Finance Bill seeks to restrict the ability to use excess credits to create a tax loss. The change takes effect for accounting periods commencing on or after January 1 2014.
Some Irish finance and intellectual property companies have sought to exploit the use of excess foreign tax credits to claim tax losses. For the avoidance of doubt, the draft legislation makes it clear that foreign tax credits may not create a tax loss. It is not clear if, by implication, the Revenue accept that the current law contained a lacuna.
Ireland as a leasing company location
The Bill extends the ability of Ireland's leasing companies to get unilateral credit relief for foreign tax suffered on foreign-sourced income. The amendment provides that unrelieved foreign tax of any accounting period may be carried forward and treated as foreign tax incurred on the same source of income in subsequent accounting periods.
This intended change is welcome and provides further strength to Ireland as one of the world's leading asset finance locations. The drafting of the clause needs some refinement to achieve its intended effect.
For many leasing companies, tax amortisation creates tax losses and a deferred tax asset. By introducing the change, the tax credit can augment the deferred tax asset and provide shelter against future Irish tax. The change ensures that the incidence of double taxation on the same source of income is mitigated in accordance with OECD principles.
Ireland as a treasury location
The Irish domestic law withholding tax exemption applying in the case of Irish source interest payments has been amended to reduce the administrative burden associated with the claiming of exemption in the case of certain treasury companies.
The simplified measures apply in the case of companies which are treasury companies (that is, advance money in the ordinary course of a trade which includes the lending of money and in whose hands the interest is received as trading income) in respect of interest payments to other companies which are:
- resident in Ireland; and
- are a member of the same group of companies as the paying company.
A 51% shareholding relationship is required for two companies to be regarded as members of a group for the purposes of this legislation.
These changes remove the notification requirements which previously existed in order for such treasury companies to avail of exemption from withholding tax and will apply to interest payments made on or after January 1 2014.
Ireland’s exit charge deferral regime
Like most other EU countries, Ireland applies an exit charge where a company ceases to be resident in the state. For certain companies, the exit charge can be postponed or indeed entirely avoided. The Finance Bill provides revised arrangements to enable tax otherwise postponed to be paid.
The new section provides such migrating companies with options to elect to defer the immediate payment of the tax arising where a company migrates its tax residency to another EU or EEA member state after January 1 2014.
The decision of the ECJ on exit charges which was delivered on November 29 2011 in National Grid Indus BV v. Inspecteur van de Belastingdienst Rijnmond / kantoor Rotterdam, indicates that the ECJ is not, in principle, opposed to an exit charge, but rather it is the timing within which the exit charge is due that may fall foul of Article 49 of the Treaty on the Functioning of the European Union, which requires the abolition of restrictions on the freedom of establishment.
The change to Ireland's exit charge regime is to demonstrate compliance with EU law, including freedom of movement of capital, whilst protecting the Irish tax base. The change does not affect the general exemption from exit tax for Irish tax resident companies of any foreign owned multinationals that wish to leave Ireland tax-free.
In compliance with EU law, the exit tax charge will now arise on a disposal of assets rather than being a deemed tax charge independent of any underlying transaction. The change will require heightened due diligence in respect of any corporate that may have migrated residence in the previous 10 years.
For further information please contact John Gulliver (jgulliver@mhc.ie; +353 1 614 5007), head of tax or Robert Henson (rhenson@mhc.ie; +353 1 614 2314), tax partner, at Mason Hayes & Curran, principal Corporate Tax correspondent for Ireland.
