The Irish Finance Minister, Michael Noonan, presented his budget to parliament
on Tuesday 14 October. One of the measures announced was the abolition of the
controversial “Double Irish” tax structure.
The “Double Irish” tax structure is an Irish tax provision which is used by certain large multinational groups which enables them to avoid paying tax anywhere in the world on profits attributable to intellectual property ("IP"). It is has been reported that Apple, Facebook and Google have enjoyed the benefits of these provisions, enabling them to significantly reduce their group tax rate in past years.
Under the current “Double Irish” structure a group has two Irish incorporated subsidiary companies. The first company is resident in Ireland. It 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.
The rules will be changed so that it is not possible for such structures to be effective. The new rules are expected to apply to all Irish incorporated companies established from 2015 and to existing companies from 2020.
The European Commission announced on 11th June 2014 that it was investigating potential breaches of the State Aid rules by Ireland with regard to Apple and the Irish Government seems to be taking action. Meanwhile the likes of Apple 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 such as the UK.
The Finance Minister made clear in his announcement that the 12.5% tax rate is going to stay for the foreseeable future. The changes made therefore affect those large corporations having what can be deemed to be aggressive planning. The 12.5% rate though means that Ireland will still provide competition for the UK when it comes to decisions by overseas companies on locating their IP and business.
Before any restructuring or refinancing is undertaken by a group with Irish operations, the tax issues in its home jurisdiction should also be considered. For more information, please contact Paul Smith