Finance (No. 2) Act 2013, which gave effect to the measures announced in Budget 2013, was signed into law on 18 December 2013. The following is a summary of changes which will be of interest to international companies doing business in or though Ireland.
Corporate Tax Residency Rules
Finance (No.2) Act 2013 addresses recent international concern that an Irish incorporated company can be in effect tax resident nowhere (ie stateless) arising as a result of a mismatch between Ireland's corporate residency rules and those of a treaty partner country. The Finance Act provides that where an Irish incorporated company that is managed and controlled in a treaty partner country would not otherwise be regarded as resident for tax purposes in any territory by virtue of the fact that:
- the company would not be resident for tax purposes in the treaty partner country because it is not incorporated in that country; and
- the company would not be resident in Ireland for tax purposes because it is not managed and controlled in Ireland, then the company will be regarded as resident in Ireland for tax purposes.
This provision came into effect on 24 October 2013 for companies incorporated on or after that date and will come into effect from 1 January 2015 for companies incorporated before 24 October 2013.
Prior to this amendment, Irish incorporated companies, managed and controlled in a treaty partner country, were not regarded as tax resident in Ireland. This amendment will now apply to such companies and in practice it will mainly affect Irish incorporated companies which are managed and controlled in the US.
Double Taxation Relief for Companies
Finance (No.2) Act 2013 contains provisions to put on legislative footing the Irish Revenue Commissioners' position in relation to double tax relief for foreign tax paid by Irish companies on foreign income where it exceeds the corresponding Irish tax paid. The changes to the tax legislation clarify that, for the purposes of Irish corporation tax, the reduction available to a company for the excess foreign tax cannot exceed the amount of the Irish measure of the foreign income. The effect of this provision is to ensure that where a company has suffered irrecoverable foreign tax for which it cannot claim foreign tax credit relief, the foreign tax cannot be used to create or increase a tax loss. This applies in respect of all types of income arising to an Irish tax resident company which has suffered tax in a country with which Ireland has a double taxation agreement, as well as interest and royalty income from countries with which Ireland does not have a double taxation agreement.
Exit Tax on Companies ceasing to be resident in Ireland
Under Irish tax law, where a company ceases to be tax resident in Ireland, the company is deemed to have disposed of, and reacquired, immediately before the event of changing residence, all of its assets at their market value at that time, triggering a charge to Irish capital gains tax. However, there is an exemption from capital gains tax where, broadly speaking, the disposing company is ultimately controlled by shareholders who are tax treaty resident but not Irish resident.
Finance (No.2) Act 2013 has introduced an option to elect or defer payment of tax where such a deemed disposal arises. This was introduced in light of recent decisions of the Court of Justice of the European Union concerning the "exit tax" regimes of other European Union ("EU") Member States. The new provision provides migrating companies with the option to defer the immediate payment of tax arising where it migrates its tax residency to another EU or EEA Member State after 1 January 2014. The immediate charge to tax may be deferred and paid in six equal annual instalments or within 60 days of the actual disposal of the migrated assets. In any event, all deferred tax is due and payable on or within a period of 10 years from the date of migration. Interest is payable on the deferred payment for the period of deferral. An immediate crystallisation of the tax payment date will arise in the event of the appointment of a liquidator to the migrating company or the company ceasing to be tax resident in an EU or European Economic Area ("EEA") Member State. The new legislation also requires the migrating company to submit annual statements to the Revenue Commissioners dealing with place of residence and whether any of the deferred tax has become due and payable.
Corporation Tax Group Loss Relief
Where companies are members of a tax group for loss purposes, the tax losses arising to one group company can be surrendered to another group company. Irish tax law specifies that two or more companies will form a loss group if one company is a 75% subsidiary of the other company or both companies are 75% subsidiaries of a third company and all members of the group are resident in an EU or a tax treaty country. However, if the parent company of the group is not resident in an EU or tax treaty country, it may still qualify as a group member if its shares are quoted on certain stock exchanges. Finance (No.2) Act 2013 has now amended the Irish tax law to clarify that a subsidiary of such a quoted company may form part of the group where it is held indirectly instead of directly.
Research and Development Tax Credit
The Irish Research and Development ("R&D") tax credit regime rewards and encourages expenditure on systematic, investigative and experimental activities in the field of science or technology by allowing a tax credit of 25% on incremental activities on R&D activities over such expenditure in a base year (2003). Finance (No.2) Act 2013 has made a number of changes to the R&D regime as follows:
- It increased the amount of expenditure qualifying for the R&D tax credit without reference to the 2003 base year from €200,000 to €300,000. This means that companies engaged in R&D activities and claiming the 25% tax credit should have up to an additional €75,000 per annum (25% of €300,000) of the credit (effectively cash) available to reinvest which will be of significant benefit to companies engaged in R&D;
- The limit on the amount of R&D that can be outsourced has been increased from 10% to 15% of the qualifying expenditure; and
- There has been an extension of the existing clawback provisions where a company has made an incorrect claim for the R&D tax credit and surrenders an amount of that credit to a key employee. In such cases, the tax foregone (by the employee) can be recovered from the company instead of the employee.
Finance (No.2) Act 2013 provides for an exemption from stamp duty on the transfer of stocks and marketable securities of companies which are listed on the Enterprise Securities Market ("ESM") of the Irish Stock Exchange. This provision is subject to a commencement order to be made by the Minister for Finance.
Film Relief Incentive
The Film Relief scheme was introduced by the Irish Government to promote the Irish film industry by encouraging investment in Irish films and providing tax relief towards the cost of the production of certain films. The scope of the relief has now been extended by Finance (No.2) Act 2013 to encompass amounts spent by qualifying film companies on employment of non-EU individuals. This measure is subject to EU State-Aid approval and a commencement order.
Interest Withholding Tax
Finance (No.2) Act 2013 introduces an amendment to the existing provisions which provide for an exemption from interest withholding tax in certain circumstances. The amendment is intended to broaden the scope of the exemption which applies to companies carrying on an active lending trade. The revised provision will allow companies to pay interest without the deduction of withholding tax to other Irish resident companies where both companies are members of the same group. Two companies will form a group where one company is a 75% subsidiary of the other or both companies are 75% subsidiaries of a third company.
Double Taxation Agreements
Finance (No.2) Act 2013 contained the necessary legislation to bring into force a Double Taxation Agreement ("DTA") between Ireland and the Ukraine. A DTA between Ireland and the Ukraine was signed on 19 April 2013 and the legal procedures to bring this agreement into force are now being followed. Finance (No.2) Act 2013 also provides for the introduction of Exchange of Information Agreements with Dominica and Montserrat.