By Aisling Donohue, Partner, Andersen Tax, Dublin
Ireland’s finance bill was introduced to the Oireachtas on 18 October, containing all the standard budgetary measures announced by the Irish Minister for Finance earlier in the month, along with more detail on the exit tax and controlled foreign company (CFC) charge announced as part of Ireland’s obligations under the EU anti-tax avoidance directive (ATAD).
The government has also significantly amended rules providing income tax relief for investments in new or innovative companies and has tweaked the provisions for amortization of intangible assets.
The charge to exit tax
The minister had announced on budget day, 9 October, that not only was he amending Ireland’s exit tax regime to comply with ATAD, he was amending the regime from budget day itself rather than from 1 January, as had been expected, or even by 1 January 2020, as required by ATAD itself.
Previously, Irish tax law applied an exit tax at 33% to gains on some, but not all, unrealised gain if a company migrated out of Ireland. If the Irish company was a member of a multinational group in many cases the previous exit tax didn’t apply.
Ireland’s finance bill provide that, from budget day, October 9, all unrealised gains will be taxed at the rate of 12.5% on migration of residence, or on the transfer of certain assets from branch to head office or branch to branch.
If the company migration is designed to avail of the lower 12.5% exit tax, rather than the normal 33% rate of tax applicable to corporate chargeable gains, then the 33% will continue to apply.
For assets such as Irish land, which remain chargeable assets in Ireland regardless of the corporate residence, the 12.5% exit tax does not apply, and the normal 33% rate will apply to the actual disposal of the assets in question.
Contrary to the budget day announcements, Ireland’s Finance bill provides, once again, a provision allowing for the exit tax to be deferred and paid by six annual installments where the other jurisdiction involved is either an EU or EEA Member State.
There is an acceleration of the deferred tax if either the company or assets move to a third country, or if the assets are sold. Revenue may seek security for the deferred tax, or seek to collect it off another group entity.
Controlled foreign company charge
As required by ATAD, Ireland’s Finance bill introduces a controlled foreign company charge with effect from 1 January 2019. This charge as drafted is broader than was originally flagged.
As required by ATAD, Ireland’s Finance bill introduces a controlled foreign company charge with effect from 1 January 2019. This charge as drafted is broader than was originally flagged.
The rules provide that where an Irish company, directly or indirectly, controls more than 50% of the foreign company, and that company is subject to a tax rate which is less than half the Irish rate which would have applied to those profits, then a CFC charge can apply.
If the income is active income, this means a foreign rate of 6.25% whereas if the income is passive income, this would require the foreign rate to exceed 12.5% to avoid the CFC charge. Certain assumptions are made in terms of calculating the profits, including that the foreign company is not a member of the group.
The charge broadly applies if either the significant people function or the balance sheet of the Irish company is instrumental in the foreign company earning income.
The charge does not apply to income associated with significant Irish people function where it would be reasonable to consider that either party acting on an arms’ length basis would have entered into the same transactions or where it is reasonable to consider that the essential purpose of the transaction is not to secure an Irish tax advantage.
The provisions also don’t apply where the balance sheet of the Irish parent is instrumental in generating the foreign income but it would not be reasonable to consider that the essential purpose of the arrangements was to secure a tax advantage, of where the controlled foreign company did not have any non-genuine arrangements in place.
There are other exemptions, including for de minimus profits (total profits below €750,000 or passive income profits below €75,000), low margin businesses (< 10% of operating costs), and regarding acquired companies beginning or ceasing to be CFCs.
Any CFC tax would be creditable against dividend income from the CFC. Given the broad exemptions for structures where it would be reasonable to believe that securing an Irish tax advantage was not the essential purpose of the structure in question, it is unlikely that many structures will have to rely on the dividend exemption.
Ireland’s Finance bill & EU law
It is worth reminding readers at this point that there are multiple sources of EU law. For EU purposes, the Treaty on the European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU) are comparable to the constitution in a country. EU directives and regulations are comparable to statute laws in a nation-state.
As the ATAD is a directive, it is possible, as with laws yielding to the constitutions in most nation-states, that the directive may require provisions which do not comply with the more fundamental treaties.
Thus, although Ireland’s new exit tax and CFC provisions may be compliant with the ATAD directive, questions remain whether they are compliant with the EU treaties.
Innovative companies, intangible assets
The rules relating to income tax relief for investments in new or innovative companies are also significantly amended in Ireland’s Finance Bill. In many regards, these are long overdue and welcome changes, ensuring that a company that raises investor capital on the basis that they qualify for the relief will not risk the tax cost of the relief being clawed back if the company is insufficiently careful in the application of the rules.
Changes were also made to the rules relating to the amortization of intangible assets.
Last year, the Irish rules for the amortization of intangibles were amended to ensure a minimum effective tax rate of 2.5% with effect from budget day last year. However, as is often the case with rushed legislation, the rules failed to provide for streaming in cases where there was acquisition expenditure both before and after 11 October 2017.
The new rules provide for such streaming will apply from 11 October 2017, the date that charge was reintroduced.
-Aisling Donohue is a partner at Andersen Tax in Dublin, specialising in international tax.
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