Today, 14 October 2014, the Irish Minister for Finance, Michael Noonan (the "Minister") confirmed that the so called "Double Irish" structure will be brought to an end. The Minister also announced a package of new measures to facilitate foreign direct investment.
The Double Irish
The Double Irish involves the holding of intellectual property ("IP") in an Irish incorporated non-Irish tax resident company that is managed and controlled, for example, in the Cayman Islands ("IP HoldCo"). In certain circumstances, where a company is incorporated in Ireland but is not managed and controlled in Ireland, it will not be Irish tax resident. The IP owned by IP HoldCo is licensed to an Irish incorporated and tax resident affiliate which exploits the IP and is responsible for sales operations outside of the US ("OpCo"). The effective tax rate in Ireland is low as a large royalty payment is made by OpCo to IP HoldCo for use of the IP. IP HoldCo does not pay tax on the royalty income which it receives.
In the Finance Act (No. 2) 2013 ("FA13") Ireland changed its rules on company residence to address the concept of 'stateless' Irish companies which arose as a result of inconsistencies between Ireland's tax residency rules and those of treaty partner countries. An Irish incorporated company is now treated as Irish tax resident from 1 January 2015 if it is managed and controlled in another EU member state or treaty partner jurisdiction (such as the US) and is not regarded as tax resident in any territory.
Most groups which have implemented the Double Irish have provided for IP HoldCo to be managed and controlled in an offshore jurisdiction and therefore the change made in FA13 should not impact such structures. It is now proposed that all companies will be tax resident in Ireland by virtue of their Irish incorporation, regardless of where they are managed and controlled. This will have the effect of bringing IP HoldCo within the charge to Irish tax as it will become Irish tax resident.
The changes will be implemented by the Finance Act 2014 (which will become law prior to the year-end). The Minister has announced that the changes will apply to newly incorporated companies from 1 January 2015. Existing structures will be grandfathered until the end of 2020.
The Minister reiterated Ireland's commitment to maintaining the 12.5% rate of corporation tax and stated: "This 12.5% tax rate is settled policy. It will not change".
The Minister also announced enhancements to the existing R&D tax credit regime. A 25% tax credit applies to amounts of qualifying R&D expenditure incurred in a given year in excess of that spent in 2003. The base year restriction will be removed from 1 January 2015. Improvements to the tax rules relating to the amortisation of IP will also be introduced. Currently, capital allowances and related interest expenditure relating to intangible assets are restricted to a maximum of 80% of the trading income from the relevant trade to which the asset relates. This 80% restriction will be removed in the Finance Act 2014.
The Minister has also highlighted his intention to implement a "knowledge development box" regime, pending the outcome of the current review of patent box regimes being conducted by the European Union and the OECD. A public consultation process relating to the knowledge development box was announced with the intention that these measures will be legislated for in Finance Act 2015.