The abolition of the “Double Irish” tax structure could see large companies moving operations to other attractive low taxed locations such as the UK.
The Irish Finance Minister, Michael Noonan, presented his budget to parliament last week, announcing the end of the tax provision that allowed multinational groups such as Apple, Facebook and Google to avoid paying tax anywhere in the world on profits attributable to intellectual property.
Paul Smith, partner at Blick Rothenberg, said: “This provision is likely to be withdrawn or significantly amended by the Irish Government, applying to all Irish incorporated companies established from 2015 and to existing companies from 2020. This means that the normal Irish 12.5% tax would be applicable to every company.
“This increase in a company’s tax bill could see large multinational corporations moving their operations to other countries such as the UK, where the tax rate will be at 20% from April 2015. This will make the UK slightly more competitive in relation to Ireland and, with only 7.5% difference in corporate tax combined with other benefits that the country may offer, multinational groups may see Britain as a better jumping off point to trade in Europe.”
Under the current ‘Double Irish’ structure a group has two Irish incorporated subsidiary companies. The first company is resident in Ireland, generates sales income and pays a royalty to the second Irish incorporated company. The royalty paid reduces the taxable profits of the first company so that it only pays a modest level of tax on its net profits. Irish tax on those net profits is taxed at the normal rate of 12.5%.
The second Irish incorporated company is, however, not tax resident in Ireland. It is, typically, managed from Bermuda (or another tax haven country) and is treated as resident of that other country for the purposes of Irish tax. Consequently, the royalty received by the second Irish incorporated company is not taxed in Ireland and, as it is resident in a tax haven where there is no corporate tax, it is not taxed there or anywhere else in the world.
Under Irish tax law, an Irish company is considered to be resident in Ireland if it is incorporated there or has its place of central management and control in Ireland. However, there are two exceptions to this rule.
The first exception applies where a company is resident in another country, as well as in Ireland and where the tax treaty between that country and Ireland determines that the company should only be treated as resident in Ireland.
The second exception is the “active trading exception”, which applies where a 50% affiliated company carries on a trade in Ireland and a qualifying ownership test is met. This test is met where the Irish incorporated company or a 50% affiliated/parent company is listed on a stock exchange in a territory that has a tax treaty with Ireland or where the ultimate control (more than 50%) of the Irish incorporated company rests with people who are EU tax residents or from countries that have concluded a tax treaty with Ireland.
Paul said: “It is this ‘active trading exception’ that has been used by groups to treat the Irish incorporated/Bermuda resident companies as not taxable in Ireland on the royalty income.
He added: “It seems that the Irish Government is now taking action after the European Commission announced it was investigating potential breaches of the State Aid rules by Ireland with regard to Apple. However, large corporations still have a further five years to enjoy the low taxed regime, after which time they may consider moving operations to other low taxed locations.