Corporate Tax Residency Rules
In the Budget Plan for 2015, the Irish Minister of Finance announced changes regarding residency rules for corporations registered in Ireland. With these new rules, the Irish Minister of Finance aims to put an end to the Double Irish structure involving Irish-registered subsidiaries. The Double Irish structure consists of two Irish incorporated companies (IERco Tax and IERco Free). However, due to the Irish tax system, only one of these companies is subject to tax (IERco Tax), while the other fully escapes Irish tax (IERco Free). The reason that IERco Free companies are not subject to tax is that Ireland does not tax an Irish company incorporated in Ireland but not managed and controlled from Ireland (but rather from a low-tax jurisdiction).The term for such company is Non-Domiciled Resident.
In a typical Double Irish structure, a parent company (frequently United States based) owns the two Irish incorporated companies. An IERco Free company owns the group’s intellectual property (IP), and grants a license for the use of the IP to the IERco Tax company. The IERco Tax company conducts the business of the company, but even where the IERco Tax company is subject to tax, its income is largely reduced through the royalty payment to the IERco Free company. These royalty payments are tax deductible at the level of IERco Tax, and often Ireland does not levy royalty withholding taxes on these payments. On the few royalties that Ireland does impose withholding taxes on, a Dutch intermediary company is used, which in turn reduces these withholding taxes to nil. Because an IERco Free company is located in a low-tax jurisdiction, the payments made by an IERco Tax company are either taxed against a very low tax rate or not taxed at all.
With the aforementioned changes to the residency rules for incorporated companies in Ireland, the Double Irish structure will no longer be effective because all Irish incorporated companies, including the Non-Domiciled Residents, will be deemed tax resident in Ireland. However, the Irish Minister of Finance announced a generous transition period for existing structures until the end of 2020. For new companies, the new legislation will take effect from the 1st of January 2015.
Corporate Tax Rate
Alongside the Irish Budget Plan 2015, the Irish Minister of Finance firmly stated that the corporate income tax rate will remain at 12.5%. The Irish Minister of Finance states: “The 12.5% Tax Rate never has been and never will be up for discussion. The 12.5% Tax Rate is settled policy. It will not Change.”
Knowledge Development Box
The Irish Minister of Finance announced that it will consult in the very near future on the introduction of a Knowledge Development Box, along the same lines of patent and innovation boxes that have existed for many years in jurisdictions that compete with Ireland for foreign investments, such as the Netherlands. The aim is to legislate the Knowledge Development Box in next year’s Finance Bill or as soon as the European Union (EU) and Organisation for Economic Co-operation and Development (OECD) discussions conclude. This is an attempt to bring onshore the previously offshored Non-Domiciled Residents, while offering that company an appealing tax rate.
The new Irish corporate residency rules can be a reaction to the current OECD base erosion and profit shifting (BEPS) proposals or to the EU State Aid investigation, to which high-technology companies in Ireland are currently subjected. Either way, it seems a preemptive reaction by the Irish Legislature. Together with the recent adjustment to the Parent-Subsidiary Directive (see changes to the Parent-Subsidiary Directive), the aforementioned changes to the Irish corporate residency rules entail another development in the field of international taxation that tightens the net around taxpayers. It is important for taxpayers to monitor these developments to avoid surprises. The grandfathering until 2020 may look attractive, but with the threat to be subject to a State Aid investigation, these benefits may not be available until 2020. Even worse, if State Aid is identified, all tax benefits must be repaid without recourse, and thus an enormous spike in the effective tax rate will be felt. Even without a State Aid investigation, these tighter rules may also have a significant impact on the audits that the local tax authorities may enact, so as a law-abiding taxpayer, you may have to spend time defending and substantiating your position upon audit. It is therefore advisable to preemptively review your international tax structure. If you require any assistance, Ryan international tax specialists can discuss the impact on and the possibilities for your company.