Recent changes to Irish corporate tax legislation
Our tax team outline several of the recent legislative changes affecting corporates:
Tax residency rules – Changes from 1 January 2021
Legislative changes to the definition of Irish tax-resident companies that were previously introduced now apply to all Irish-incorporated companies. From 1 January 2015, newly Irish-incorporated companies are Irish tax-resident unless they are resident in another country with which Ireland has a double tax treaty. Grandfathering rules were introduced for existing companies, which disapplied this rule and allowed existing Irish-incorporated companies to remain resident in any foreign jurisdiction until the end of December 2020.From 1 January 2021, the Irish tax residency rules will deem any Irish-incorporated company as tax-resident in Ireland unless it is managed and controlled from a country within the EU or with which Ireland has a double tax treaty. The effect of this change is that it will no longer be possible for an Irish-incorporated company to be regarded as solely tax-resident in, for example, Bermuda.
The Multilateral Instrument (MLI)
Dual residence
The MLI was introduced by the OECD and operates by introducing a series of tax treaty measures with the aim of updating international tax rules and lessening the opportunity for tax avoidance by multinational enterprises.
Article 4 of the MLI provides for a new form of “tie-breaker” rule where a company is considered tax-resident in Ireland and another jurisdiction under the laws of both countries. In such a case, the competent authorities of the relevant jurisdictions shall determine a sole jurisdiction of residence by mutual agreement having regard to that company’s place of effective management. Ireland adopted Article 4 of the MLI in January 2019, meaning the tie-breaker rule will impact on Irish tax treaties where the corresponding treaty partner has ratified the MLI and has also opted for the same rule.
While not all of Ireland’s double tax treaties have been amended for this rule, it is notable that the treaty with the United Kingdom has been amended so that it is no longer possible to automatically deem an Irish-incorporated company as tax-resident in the UK solely on the principle that the effective management of the company takes place in the UK.
When the tie-breaker rule is being considered, the taxpayer may apply to the competent authority of either jurisdiction to initiate the Mutual Agreement Procedures (MAP) request.
This process can be lengthy, and the risk of double taxation for a dual-resident company that previously relied on the standard effective place of management tie-breaker clause needs to be considered and managed as a matter of urgency.
Permanent Establishment (PE)
The MLI includes optional changes to the PE definition. Ireland has adopted the following provisions:
Article 13: Ireland adopted Option B, which sets out anti-fragmentation measures which can operate to aggregate presence and activities in a jurisdiction to meet the threshold for creation of a taxable PE in that jurisdiction.
Article 15: Ireland adopted an anti-avoidance rule against contractual arrangements that artificially seek (using the PE exceptions) to prevent certain building sites from being classified as PEs.
The EU Anti-Tax Avoidance Directive (ATAD)
Anti-hybrid rulesThe anti-hybrid rules apply to all corporate taxpayers in relation to payments in respect of cross-border transactions made after 1 January 2020. The anti-hybrid provisions were introduced to prevent taxpayers from engaging in tax system arbitrage by identifying differences in the tax systems of countries which can give rise to either double deduction mismatch outcomes (where an expense is deductible for tax purposes twice) or deduction without inclusion mismatch outcomes (where a payment is deductible but the person who receives the payment does not see it as taxable).
The rules focus on transactions between “associated entities” whereby generally one entity makes a payment for which a deduction is available, giving rise to a “hybrid” outcome. The rules are intended to neutralise a mismatch outcome where a deductible payment has been made without a corresponding amount of income being included for tax by the payee. The rules aim to capture instances where a deduction for the same payment is allowed in more than one territory, but the “double deduction” is not set against “dual inclusion” income.
To apply the correct tax treatment to cross-border transactions, taxpayers will need to be aware of both the Irish tax treatment of the transaction and the potential tax treatment of the relevant instruments and/or entities in the other jurisdictions involved.
Mandatory reporting
The Directive requires reportable cross-border arrangements to be reported within 30 days after such arrangement is made available for implementation/ready for implementation, or the first step in the implementation has been made. The disclosure regime became effective in all member states on 1 July 2020, with a “look-back” reporting period for reportable cross-border arrangements where the first step was implemented between 25 June 2018 and 30 June 2020. However, due to COVID-19, Ireland exercised an option given in DAC 6 to defer the first disclosures of information until 28 February 2021.
