2014-Issue 43—Under increasing pressure from its EU cousins, the pro-business country of Ireland has announced changes to its tax residency rules. Notably, and as we will focus in this edition of Tax Advisor Weekly, Ireland's finance minister announced changes in the area of “double Irish” structures, details of which have recently been published in the finance bill. Under such structures, several U.S. multinationals had previously been afforded the opportunity to achieve effective tax rates similar to their global peers. However, some of these U.S. multinationals will need to re-evaluate their tax structures under the coming changes to find suitable alternatives in order to stay competitive. But many companies will be pleasantly surprised to find that their existing structures will survive this change.
Double Irish structures operate within the Irish tax residency rules. Currently, entities incorporated in Ireland are by default treated as tax resident in Ireland. Nonetheless, two exclusions from this default rule exist.
The first exclusion, which has allowed many double Irish structures to operate, applies when the Irish incorporated company is directly or indirectly controlled by a treaty-based company (e.g., a U.S. public parent) and also carries on a trade in Ireland or is connected to another Irish company that's carrying on a trade in Ireland. Under such exclusion, Irish subsidiary companies that are, for example, tax resident in non-treaty countries such as Bermuda or the Cayman Islands operate exempt from tax in Ireland because they are managed and controlled in those foreign countries.
With effect from January 1, 2015, no new structures will be in a position to avail of the double Irish regime using this exclusion. For existing companies incorporated in Ireland and resident in a non-tax-treaty-partner jurisdiction, a grandfathering period will apply until the end of 2020. To give effect to this change, the finance bill has amended the residence rules to provide that companies incorporated in Ireland after January 1, 2015 shall be deemed to be tax resident in Ireland, while companies incorporated before January 1, 2015 shall be deemed to be tax resident in Ireland from January 1, 2021.
The second exclusion from Irish tax residency applies if an Irish company is resident in another country by virtue of an Irish income tax treaty. This exclusion applies, for example, when the Irish incorporated company is managed and controlled in a treaty jurisdiction, such as Malta, and where the tiebreaker rule of the treaty applies to enforce Malta as the place of tax residency. As an active member of the OECD, Ireland continues to respect its income tax treaties and, therefore, continues to abide by their tiebreaker provisions. Accordingly, details contained in the October 24th finance bill have confirmed that this exclusion will remain in place.
As the second, treaty-based exclusion has remained in place, no change may be necessary for structures relying on residency in treaty-based countries. In other words, if a company is incorporated in Ireland but is managed and controlled in a treaty-based country, then typically tax residence defaults to where the entity is managed and controlled, and the tiebreaker rules of the treaty will continue to apply. So, for example, if a company is formed in Ireland but is managed and controlled from Malta, then, under the tiebreaker rule in the Ireland-Malta income tax treaty, such company would be resident and taxable only in Malta, and not in Ireland.
Of course, a company's operating footprint must align with its structure, and further tax rulings in Malta for such an arrangement are typically sought. To this end, it has been our experience with clients that together we can achieve the right combination of operating requirements and taxing authority approvals, particularly involving Ireland and Malta. (For more information, see Taxand's member law firm in Ireland, Willam Fry, and Avanzia Taxand in Malta.) Depending on the underlying activity and operations, we have also seen other European jurisdictions utilized, such as the Double Dutch in the Netherlands or analogous structures in Luxembourg, Belgium, Spain and France.
Along with changes to the tax residency rules, Finance Minister Michael Noonan announced the intent to create a “best in class” patent box regime, referred to as the “knowledge development box,” which is expected to be modeled closely after the U.K. patent box but with a lower rate. Irish officials are currently considering the feasibility of applying a 6.25 percent statutory tax rate to the knowledge development box. The finance bill also includes other positive changes for Ireland’s onshore intellectual property (IP) regime, such as reducing minimum taxes, expanding the definition of IP and enhancing employment incentives. So, for example, if a U.S. multinational needs to phase out its current double Irish structure, the possibility exists to sell its intellectual property back into Ireland to qualify for the knowledge development box and other incentives. In certain instances, such planning may even be preferable to maintaining a valid double Irish structure.
Alvarez & Marsal Taxand Says:
- The pro-business 12.5 percent tax rate in Ireland is expected to continue.
- Structures that currently rely on the first exclusion to the tax residency rules have six years to re-evaluate and restructure.
- Structures relying on treaty provisions for tax residency should be unaffected.
- The time may be right to re-evaluate the tax footprint of your company’s intellectual property holdings.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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