On 18 October 2018, Ireland's Finance Bill 2018 (the "Bill") was published. The Bill will be debated in the Oireachtas over the coming weeks and is expected to be signed into law before the end of the year. The key changes included in the Bill affecting multinational organisations operating in Ireland are:
- the introduction of controlled foreign company rules as required by the EU Anti-Tax Avoidance Directive;
- the implementation of a 12.5% exit charge on company migrations from Ireland and the allocation of assets from an Irish permanent establishment to the head office or a permanent establishment in another jurisdiction;
- a technical clarification to Ireland's rules on the amortisation of intellectual property assets requiring taxpayers to separately stream income from assets acquired before 11 October 2017; and
- the ability to re-open tax years outside the four year time limit to make an adjustment that has been agreed under a mutual agreement procedure.
Other provisions are likely to be included in the Bill as it passes through the legislative process and we will keep you updated of any relevant changes. In the meantime, more detail on the key changes for multinationals operating in Ireland are included below.
The introduction of CFC rules
Controlled foreign company ("CFC") rules are being introduced for accounting periods beginning on or after 1 January 2019 in accordance with the requirements of the EU's Anti-Tax Avoidance Directive ("ATAD").
Under the Irish 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). For this purpose, 'control' is defined broadly and includes both direct and indirect control.
However, just because a company is regarded as a CFC does not of itself result in a CFC charge arising. A CFC charge will only arise to the extent that:
- the CFC has undistributed income (it is important to note that the term 'undistributed profits' for this purpose does not extend to include capital gains); and
- the CFC generates income by reference to activities carried on in Ireland (in very general terms, if the CFC relies on people in Ireland to manage assets or risks which generate income for the CFC, the CFC will be regarded as generating income by reference to Irish activities).
In cases where the CFC relies on Irish activities to generate its income, no CFC charge will arise if it can be established that:
- the arrangements were entered into on arm's length terms;
- the arrangements are subject to Irish transfer pricing rules;
- the essential purpose of the arrangements is not to secure a tax advantage; or
- the CFC did not have any non-genuine arrangements in place.
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). The CFC charge will be reduced and credit will be given for any foreign tax paid by the CFC on its income and other CFC charges imposed by other countries by reference to the profits of the CFC.
A number of exemptions from the CFC charge are included in the draft legalisation:
- 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, then 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 (not including amounts paid to affiliates or the cost of goods purchased by the CFC which are not used by the CFC in its country of residence), then no CFC charge will apply.
- A low accounting profit exemption – if the accounting profits of the CFC are less than €75,000, 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.
- Exempt period exemption – similar to the UK CFC rules, the Irish provisions permit a one year period of grace for newly acquired foreign subsidiaries of Irish companies.
The rules are relatively detailed and we would expect that they will be supplemented by Revenue Guidance.
The exit charge
The legislation to implement the exit charge announced in the budget statement (and which applies from 10 October 2018) is included in full at section 30 of the Bill. It replaces Ireland's existing exit charge in full. Under the new provisions an exit charge will arise when:
- a company migrates its place of residence from Ireland to any other jurisdiction;
- assets of an Irish permanent establishment ("PE") are allocated from the PE to the company's head office or to a PE in another jurisdiction – this provision only applies in respect of companies that are resident in an EU Member State other than Ireland; or
- the business of an Irish PE is allocated from the PE to the company's head office or to a PE in another jurisdiction – again, this provision only applies in respect of companies that are resident in an EU Member State other than Ireland.
The exit tax is charged at 12.5% and applies to the latent gain inherent in the assets. The exit charge does not apply to assets that remain within the Irish tax charge (for example, Irish real estate or assets that continue to be used in the business of an Irish branch).
The exit charge may be deferred and paid over five years. If the exit charge is unpaid, Revenue may pursue any other Irish resident group company or an Irish resident director who has a controlling interest in the company that is subject to the charge.
Amendment to Ireland's amortisation regime for IP (section 291A TCA)
A relatively technical amendment has been made to the amortisation regime for intellectual property ("IP") to reflect changes that were included in last year's Finance Act. Under Ireland's amortisation regime, taxpayers are permitted to write-down the cost of acquiring IP and offset that write-down against taxable profits earned from that IP.
Under changes made to the regime last year, taxpayers claiming the benefit of the relief are permitted to offset a maximum of 80% of profits earned from IP acquired after 11 October 2017. As a result of that change, section 26 of the Bill requires taxpayers who acquired IP benefitting from the regime both before and after 11 October 2017 to separately stream the income earned from the assets acquired before 11 October 2017 and the income earned from the assets acquired on or after 11 October 2017. The 80% cap should only be applied to the latter income stream. This reflects the position included in existing guidance issued by the Revenue Commissioners.
Ability to re-open historic tax years following adjustments agreed under MAP
Revenue now have the ability to re-open tax years outside the four year limitation period where taxpayers have had profits adjusted in accordance with a mutual agreement procedure. This provision should come into force once the Bill is enacted.
Second stage debates on the Bill have commenced and the Committee Stage will commence on 7 November. We will keep you updated on any relevant changes made during the legislative process. It is expected that the Bill will be signed into law before the end of the year.
Separate to the Bill, we expect the Department of Finance to launch consultations on the implementation of Irish anti-hybrid rules and an interest limitation rule over the coming weeks.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.