Corporate Tax

Company Tax – Eire: 2021 – Tax

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Overview of corporate tax work over the last year

Financial services

Ireland is a leading European jurisdiction for the establishment
of bond-issuing special-purpose vehicles
(“SPVs“) and securitisation companies.
In 2019, the Irish share of the number of Euro area “Financial
and Vehicle Corporations” (“FVCs“)
was 27.6%. FVCs are bond-issuing companies required to report to
the European Central Bank.

Ireland is also a leading domicile for internationally
distributed investment funds. In 2020, the total funds assets under
administration in Ireland was €5.4 trillion, with the number
of funds domiciled in Ireland as at March 2021 being 8,105 and
approximately €3.5 trillion held in these Irish domiciled
funds.

Mergers and acquisitions

2020 was another relatively strong year for M&A activity in
Ireland and the market has been described as “resilient”
in the midst of the COVID-19 pandemic. Three hundred and
twenty-five transactions were announced in the first nine months of
2020, which marked a decline of just under 4% on the same period in
2019.

Aircraft leasing and aviation finance

Ireland is a global centre for aircraft leasing with over 50
aircraft leasing companies based in Ireland, including 14 of the
world’s top 15 lessors. Over the past 10 years, the commercial
aviation industry had enjoyed sustained growth. However, the onset
of the COVID-19 pandemic and the restrictions introduced in
response to it have created unprecedented market conditions for the
aviation leasing and finance industry. Those conditions and
uncertainties are set to continue in 2021; however, it is expected
that travel will ultimately rebound and there is certainly
continued investor interest in the sector.

Intellectual property

Ireland is a leading location for the development, exploitation
and management of intellectual property
(“IP“). According to IDA Ireland, the
number of global companies centralising their IP management in
Ireland has made Ireland one of the largest exporters of IP in the
world. Eight of the top 10 global technology companies, eight of
the top 10 global pharmaceutical companies and 15 of the top 25
medical devices firms in the world are located in Ireland. In
recent years, Ireland has attracted a range of innovative social
media companies, including Google, Facebook, Twitter and LinkedIn,
all of whom have established substantial operations in Ireland.

Tax disputes

2020 was another significant year for Ireland in the area of tax
disputes. The Tax Appeals Commission (the
TAC“), which was newly reconstituted in
2016, made progress in dealing with a backlog of cases. The TAC
closed 1,392 appeals during 2020 with the quantum of monies
involved amounting to approximately €820 million. Two hundred
and fifty hearings are scheduled for 2020, with further hearings to
be added during the year. As such, this represents a significant
area of work for Irish tax practitioners.

Of particular note are the developments in the Perrigo
tax case over the past year. This case arose out of a €1.64
billion assessment issued by the Irish Revenue Commissioners
(“Revenue“) in 2018 against Perrigo
Company plc. In February 2019, Perrigo brought proceedings in the
Irish Commercial Court seeking judicial review of the decision by
Revenue to raise that assessment. Those proceedings were brought
primarily on the basis that Perrigo had a legitimate expectation
that the transaction at issue be treated as a part of its trade.
Perrigo argued that Revenue’s amended tax assessment breached
that legitimate expectation. In 2020, this claim was denied by the
Court, which held that Perrigo had failed to establish any basis to
interfere with the Revenue assessment. Perrigo has decided not to
appeal this decision. The substantive points of tax law at issue in
the case are scheduled to be heard before the TAC in November
2021.

In addition, the EU General Court determined on 15 July 2020
that Ireland did not give Apple illegal State Aid, so overturning
the earlier European Commission decision. In September 2020, the
European Commission announced its intention to appeal this ruling
to the European Court of Justice.

Finally, in January 2021, it was announced that the
pharmaceutical company AbbVie was bringing a Judicial Review action
against Revenue arising from a tax liability of €587 million
arising from the takeover of the pharmaceutical company
Allergen.

Key developments affecting corporate tax law and practice

COVID-19 pandemic response

Ireland introduced a number of tax measures aimed at assisting
taxpayers experiencing difficulties caused by the COVID-19
pandemic. Among the measures introduced were the following:

  • A COVID restrictions support scheme was introduced, which is
    targeted at those businesses worst affected by the pandemic and
    which allows certain businesses to apply for a weekly cash payment
    calculated by reference to the business’ average weekly
    turnover in 2019 subject to a cap of €5,000 per week. Relief
    schemes for employees impacted by the pandemic are also in
    place.
  • The suspension of a surcharge for late corporation tax return
    filings for accounting periods ending June 2019 until 1 July 2021.
    Late filing will also not trigger any restriction of reliefs, such
    as loss relief and group relief, as would ordinarily be the
    case.
  • Unpaid VAT and PAYE arising during the COVID-19 crisis in 2020
    and 2021 can be warehoused for a period of 12 months commencing 1
    January 2022 to the end of December 2022. After the 12-month
    interest-free period, the warehoused debts can be repaid at a low
    interest rate of 3% per annum.
  • The filing deadline for all 2019 share scheme returns was
    extended from 31 March 2020 to 30 June 2020. The filing deadline
    for all 2020 share scheme returns was 31 March 2021.
  • The 90-day employer filing obligation applicable to the Special
    Assignee Relief Programme was extended for a further 60 days. This
    concessionary measure ceased to apply on 31 December 2020.
  • Cross-border workers relief was not affected by employees being
    required to work from home in Ireland due to COVID-19. This
    concessionary measure will continue to apply for the tax year
    2021:
    1. where an employee is required to work from home in Ireland due
      to COVID-19; and
    2. provided all other conditions of the relief are met.
  • Similarly, Revenue agreed not to enforce Irish payroll
    obligations where an employee relocated temporarily to Ireland
    during the COVID-19 period and performed duties for their employer
    from Ireland. Revenue also agreed not to strictly enforce the
    30-day notification requirement for PAYE dispensations applicable
    to certain short-term business travellers. In addition, PAYE
    exclusion orders were not adversely affected by an employee working
    more than 30 days in Ireland as a result of COVID-19. These
    concessionary measures ceased to apply on 31 December 2020.
  • For the purposes of Irish tax residency rules, where a
    departure from Ireland was prevented due to COVID-19, Revenue will
    consider this force majeure for the purpose of
    establishing an individual’s tax residence position. Revenue
    has issued guidance that cautions that due to the unanticipated
    length of the pandemic, it is appropriate to further consider the
    application and scope of this concession.
  • For the purposes of corporate tax residence, Revenue
    disregarded the presence of employees, directors, service providers
    or agents in or outside Ireland resulting from COVID-19-related
    travel restrictions. In these circumstances, Revenue has advised
    that the individual and company should maintain a record of the
    facts with respect to any bona fide relevant presence in
    or outside Ireland.
  • Following the adoption of Council Directive (EU) 2020/876,
    which allowed for the deferral of the exchange dates for DAC2, and
    the filing and exchange dates for DAC6, Revenue deferred the
    deadline for filing DAC2 returns in respect of the 2019 reporting
    period until 30 September 2020. This deadline will also apply for
    the filing of Common Reporting Standard and Foreign Account Tax
    Compliance Act returns. Finally, DAC6 reporting deadlines were
    deferred by six months.
  • Importation of goods to combat the effects of COVID-19 from
    outside the European Union (the “EU“)
    without the payment of Customs Duty and VAT from 30 January 2020 to
    31 December 2021.

OECD BEPS and domestic legislation

There have been continued developments in Irish corporate tax
law on the international front. These developments have been
motivated by the Irish Government’s continued commitment to the
implementation of the reforms set out in “Ireland’s
Corporation Tax Roadmap”, which was published in September
2018 and updated on 14 January 2021 (the “2021
Corporation Tax Roadmap Update
“). This Roadmap sets
out how, to date, Ireland has met its tax reform commitments under
the 2018 Roadmap and laid out the next steps in Ireland’s
implementation of its various commitments to international tax
reform. Most significant is Ireland’s implementation of the
reforms proposed as part of the OECD Base Erosion and Profit
Shifting (“BEPS“) process, the EU
Anti-Tax Avoidance Directive (“ATAD“)
and the EU Directive on Administrative Cooperation.

The most significant developments in Ireland’s
implementation of these initiatives during 2020 and 2021 concerned
the following:

  • Transfer pricing rules.
  • Anti-hybrid and anti-reverse hybrid rules.
  • DAC6 – Mandatory Disclosure Regime.
  • Double taxation treaties.
  • Exit Tax Regime.
  • Interest limitation rule.

Transfer pricing rules

Formal transfer pricing legislation (the “Irish TP
Rules
“) was introduced for the first time in Ireland
in 2010 in respect of accounting periods commencing on or after 1
January 2011, for transactions the terms of which were agreed on or
after 1 July 2010.

A number of changes to the Irish TP Rules were introduced as
part of the Finance Act 2019 and those changes have applied from 1
January 2020. The Finance Act 2019 changes brought the Irish TP
Rules in line with the 2017 OECD Guidelines. They significantly
broadened the scope of the Irish TP Rules and included an extension
of the Irish TP Rules to non-trading and capital transactions.
Additionally, arrangements predating 1 July 2010 were brought into
scope for the first time.

In order to fall within the Irish TP Rules, there must be an
arrangement between associated parties involving the supply and
acquisition of goods, services, money, intangibles or chargeable
assets. The rules provide that in the case of a transaction where
the amount paid to the supplier exceeds, or the amount received
from the customer is less than, the arm’s length price, then
the profits of the customer or vendor, respectively, will be
calculated as though the price was an arm’s length price.

The Irish TP Rules apply the arm’s length principle, which
is to be interpreted in accordance with the OECD Transfer Pricing
Guidelines for Multinational Enterprises and Tax
Administrators.

The rules apply to both cross-border and domestic transactions.
The Irish legislation contains rules to eliminate double counting
where domestic transactions only are involved.

The rules apply even where both parties are within the charge to
Irish tax to ensure that the rules are not discriminatory from an
EU law perspective. However, where the profits of one party are
adjusted under the legislation, the rules provide that, where the
other party is also within the charge to Irish tax, they can make
an election to use the arm’s length price in the calculation of
their profits so that the group is not disadvantaged.

Two persons are associated if one controls the other or both are
controlled by the same person. The controlled person in each case
must be a company. A company will be treated as controlled by an
individual if the individual, together with relatives of that
individual (i.e. husband, wife, ancestor, lineal descendant,
brother or sister), control it.

Although the legislation was extended to include small and
medium-sized enterprises, this is subject to enactment under a
Ministerial order. Accordingly, the new transfer pricing regime
does not currently apply to enterprises that employ less than 250
employees, and have a turnover not exceeding €50 million, or
total assets not exceeding €43 million in value.

A “domestic carve out” from the Irish TP Rules applies
to certain non-trading transactions where:

  • both the supplier and acquirer are “qualifying
    persons” (i.e. resident and chargeable to tax in the normal
    course in Ireland);
  • the arrangement is not one in which the sole or main purpose is
    the avoidance of tax; and
  • certain other conditions are met.

A number of further changes were proposed in the Irish Finance
Act 2020 to clarify the situations in which the “domestic
carve out” would apply. Those changes were subject to a number
of late amendments and the amendments are subject to enactment
under a Ministerial order, which means they have not yet taken
effect.

The 2021 Corporation Tax Roadmap Update now proposes to further
extend the Irish TP Rules to the taxation of branches in Ireland in
line with the Authorised OECD Approach. It is currently expected
that legislation to implement this will be included in the Irish
Finance Bill 2021.

Anti-hybrid and anti-reverse hybrid rules

Ireland has implemented legislation to address hybrid mismatch
arrangements as required by Council Directive (EU) 2017/952,
amending Directive (EU) 2016/1164 (“ATAD
II
“). The Irish implementing legislation (other than
with respect to anti-reverse hybrid rules) took effect from 1
January 2020 in respect of all payments made after that date.
Grandfathering of historic structures was not introduced.

A hybrid mismatch arrangement is a cross-border arrangement that
generally involves a hybrid entity or hybrid instrument and results
in a mismatch in the tax treatment of a payment across
jurisdictions.

Relationship between the parties

The Irish legislation generally (other than with respect to
withholding tax and tax residency forms of hybrid mismatch) only
applies where the parties are (i) associated enterprises, (ii) head
offices and permanent establishments, (iii) permanent
establishments of the same entity, or (iv) parties to a structured
arrangement.

Broadly, enterprises will be associated where:

  1. one enterprise holds a certain percentage (25% or 50% depending
    on the particular provision) of the shares, voting rights or rights
    to profits in the other enterprise, or if there is a third
    enterprise that holds an equivalent interest in both
    enterprises;
  2. both enterprises are included in the same set of consolidated
    financial statements prepared under international accounting
    standards or Irish generally accepted accounting practice, or both
    enterprises would be included in the same set of financial
    statements if such statements were to be prepared in accordance
    with those accounting practices (this is subject to certain
    exceptions); or
  3. one enterprise has significant influence in the management of
    the other enterprise, where significant influence means the ability
    to participate on the board of directors or equivalent governing
    body of that enterprise, in its financial and operating
    policy.

A structured arrangement is one where the mismatch outcome is
priced into the terms of the arrangement or the arrangement was
designed to give rise to a mismatch outcome.

Forms of hybrid mismatch

The forms of hybrid mismatch that the legislation addresses are
those arising by virtue of double deductions, permanent
establishments, financial instruments, hybrid entities, withholding
tax and tax residency.

Broadly, where a payment has been “included” by a
payee, such inclusion will generally mean that a hybrid mismatch
does not arise. Payments are considered to be included where the
payee is:

  • chargeable to tax on that payment (other than on a remittance
    basis);
  • exempt from tax on its profits or gains;
  • established in a jurisdiction that does not impose tax on such
    payment; or
  • subject to a controlled foreign company charge or foreign
    company charge.

Application

The rules could apply whenever Irish companies make payments
that give rise to a tax deduction in Ireland, but no other country
taxes the associated receipt by reason of hybridity. If the hybrid
rules apply to such a payment, the Irish company may be denied a
tax deduction for the payment.

Anti-reverse hybrid rules

The 2021 Corporation Tax Roadmap Update outlines the intention
that Ireland will introduce anti-reverse hybrid rules in the Irish
Finance Act 2021. This would be in line with the schedule for
implementation that was set out in ATAD II.

A “reverse hybrid entity” refers to a foreign-owned
entity established or incorporated in a Member State that is
treated as opaque for tax purposes under the laws of the foreign
jurisdiction but as transparent in the Member State where it is
established or incorporated.

Where the rules apply, the result will be that the reverse
hybrid entity be regarded as resident in the relevant Member State
and taxed on its income to the extent that it is not otherwise
taxed under the laws of the Member State or any other
jurisdiction.

EU DAC6 – Mandatory Disclosure Regime

Ireland has implemented the EU DAC6 rules, which require
intermediaries and, in certain cases, taxpayers to notify tax
authorities when they promote or, broadly, assist in implementing
cross-border arrangements with particular tax
“hallmarks”.

An arrangement will be “cross-border” where it
concerns either more than one EU Member State or one EU Member
State and a third country (a non-EU Member State). A cross-border
arrangement will be reportable if it falls within any one of the
hallmarks set out in Annex IV of DAC6. Of the five categories of
hallmarks, two have to also satisfy a “main benefit test”
while the other three do not. The main benefit test will be met
where obtaining a tax advantage (as defined in Part 33, Chapter 3A
of the Irish Taxes Consolidation Act 1997 (the
TCA“)) is one of the main benefits that
a person may reasonably expect to derive from the arrangement.

Reporting obligations apply to intermediaries and, in certain
cases, taxpayers. The term “intermediary” is very broad
and can apply to a number of different participants in an
arrangement. It includes anyone who designs, markets, organises or
makes available or implements a reportable arrangement, or anyone
who aids or assists with reportable arrangements and knows, or
could reasonably be expected to have known, that they are doing so.
This could include accountants, financial advisers, lawyers,
in-house counsel and banks.

If the arrangement is deemed to be reportable, the ensuing
reporting obligation lies with all intermediaries involved in a
transaction, unless an intermediary can prove that another
intermediary involved has reported the arrangement. Disclosure need
only be made once in respect of an arrangement.

An intermediary is not required to report information with
respect to which a claim of legal professional privilege could be
maintained by the intermediary in legal proceedings. However, in
such cases, the intermediary must, without delay, notify any other
intermediary, or the relevant taxpayer if there are no other
intermediaries, of the obligations imposed on the other
intermediary/relevant taxpayer, as appropriate. The obligation may
revert to the taxpayer in certain situations, including where all
EU-based intermediaries invoke legal professional privilege.

As originally implemented, reportable arrangements occurring
between 25 June 2018 and 30 June 2020 were required to be reported
no later than 31 August 2020. In addition, from 1 July 2020,
reportable arrangements were intended to be reported within 30 days
beginning from:

  • the day after the arrangement is made available for
    implementation;
  • the day after the arrangement is ready for implementation;
  • when the first step in the implementation has been made,
    whichever is first; or
  • the day after the intermediary provided, directly or by means
    of other persons, aid, assistance or advice.

However, as part of the response to COVID-19, the EU permanent
Member State representatives on the Permanent Representatives
Committee reached an agreement for an optional six-month deferral
for both reporting and information exchange under DAC6. Ireland
implemented this deferral with the following effect:

  • Reportable cross-border arrangements implemented between 25
    June 2018 and 30 June 2020 had to be reported by 28 February 2021
    (i.e. up to six months after the original deadline of 31 August
    2020).
  • Reportable cross-border arrangements occurring between 1 July
    2020 and 31 December 2020 had to be disclosed within 30 days from 1
    January 2021.
  • Reportable cross-border arrangements occurring on or after 1
    January 2021 should be disclosed within a 30-day period.

The Irish legislation provides for monetary penalties for
non-compliance. The severity of penalties depends on the type of
breach involved. Certain breaches by taxpayers and intermediaries
carry a penalty of up to €4,000, with a further penalty of up
to €500 per day for each day on which the failure
continues.

The Irish implementation of DAC6 is a significant new
development potentially affecting many ordinary cross-border
commercial transactions. Intermediaries and taxpayers will need to
monitor transactions and assess whether they are reportable,
particularly bearing in mind the complex legal interpretation of
the legislation and potential exclusions.

Double taxation treaties

On 29 February 2020, a new treaty between Ireland and the
Netherlands entered into force with its provisions coming into
effect on 1 January 2021. On 21 October 2020, a Protocol to the
existing treaty and amending Protocols between Ireland and
Switzerland entered into force with the provisions entering into
effect on 1 January 2021. On 19 January 2021, Ireland and Germany
signed a Protocol amending the tax treaty between the two
countries. Procedures to ratify the Protocol are under way.

Negotiations have concluded for new treaties between Ireland and
each of the following countries: Kenya; Kosovo; Oman; and
Uruguay.

Negotiations have also concluded on Protocols to the existing
treaties with Guernsey, Isle of Man and Mexico.

In addition to the negotiation of new treaties, certain of
Ireland’s existing tax treaties have been modified by the
operation of the OECD Multilateral Convention to Implement Tax
Treaty Measures to Prevent BEPS (the
MLI“). Ireland deposited its instrument
of ratification of the MLI on 29 January 2019. The date on which
the MLI modifies each treaty depends on when Ireland’s treaty
partners deposit their instruments of ratification. As a general
rule, it has taken effect for Ireland’s covered tax agreements
as follows:

  • with respect to taxes withheld at source, from 1 January 2020;
    and
  • with respect to all other taxes levied by Ireland, for taxes
    levied with respect to taxable periods beginning on or after 1
    November 2019.

The MLI operates so as to modify existing tax treaties, and how
each treaty is modified depends on the method of implementation
adopted by each contracting state. The key provisions in respect of
Irish double tax treaties are in relation to the tax treatment of
transparent entities, dual resident entities, and the introduction
of a principal purpose test (“PPT“). The
PPT is significant and will essentially bring in a “business
purpose” test that must be satisfied by a resident before it
can be entitled to benefit from the treaty in question.

The 2021 Corporation Tax Roadmap Update also outlined
Ireland’s commitment to publishing a tax treaty policy
statement and a public consultation with respect to this has been
initiated.

Exit Tax Regime

Ireland introduced new “exit tax” rules for companies
in the Finance Act 2018. The Finance Act 2019 extended those rules
such that transfers by non-EU companies with a permanent
establishment in Ireland are now also captured. Previously, only
companies resident in Ireland or another EU Member State were
within scope.

The Irish legislation permits a company to spread the tax charge
and pay it over five years in equal instalments if an election is
made and provided that the assets have been transferred to an EU
Member State or a country with which Ireland has signed a double
tax treaty and which is an EEA country.

Effective from 14 October 2020, a technical amendment to the
legislation was made to clarify the operation of interest on
instalment payments. The amendment provides that calculation of
interest on exit tax instalment payments that remain unpaid on or
after 14 October 2020 should be calculated on the outstanding
balance and not by reference to the amount of the particular
instalment due.

Interest limitation rule

ATAD, adopted by the EC Council on 12 July 2016, requires Member
States to implement an interest limitation ratio, designed to limit
the ability of entities to deduct net borrowing costs in a given
year to a maximum of 30% of Earnings Before Interest, Tax,
Depreciation and Amortisation
(“EBITDA“).

In 2016, the then Irish Minister for Finance stated that Ireland
would not introduce the interest limitation rule until 2024 on the
basis that Ireland had equivalent rules. However, the European
Commission did not agree with this and on 25 July 2019 issued a
formal notice to Ireland to implement the interest limitation rule.
Following the issuance of this formal notice, the Irish Department
of Finance stated that transposition could advance, which would
lead to implementation at a date that is earlier than 2024. In the
2021 Corporation Tax Roadmap Update, it was outlined that Ireland
has agreed to accelerate the transposition process with the
intention that transposition will take place in the Irish Finance
Bill 2021, with the rules taking effect from 1 January 2022. The
Department of Finance commenced an iterative consultation process
in early 2021 which is, at the time of writing, ongoing.

The interest limitation rule operates by restricting the tax
deductibility of “exceeding borrowing costs”. This is the
amount by which the taxpayer’s borrowing costs (i.e. deductible
interest expense) exceeds its taxable interest revenue and other
economically equivalent income.

Under the interest limitation rule, the amount of exceeding
borrowing costs that can be deducted by the taxpayer is limited to
30% of the taxpayer’s EBITDA. Under ATAD, Member States have a
number of choices regarding implementation, including an option to
allow taxpayers to deduct borrowing costs up to €3 million and
to exempt certain entities, such as entities that qualify as
financial undertakings. Ireland has not yet published draft
legislation indicating which of the various options and derogations
it will implement. Accordingly, the manner in which the interest
limitation rule will apply in Ireland is uncertain.

Domestic tax court cases

Perrigo Company plc

It was announced in December 2018 that Revenue had assessed a
subsidiary of Perrigo Company plc to a tax liability of €1.636
billion, not including potential interest or any applicable
penalties. Perrigo brought judicial review proceedings in respect
of the Revenue assessment. Those judicial review proceedings were
heard by the Irish High Court in June 2020 and it was ruled that
Perrigo had failed to establish any basis to interfere with the
assessment. Perrigo has decided not to appeal this decision and
instead, the substantive matters of tax law arising in the case
will proceed to be heard before the TAC in November 2021.

The Revenue assessment related to the sale in 2013 by what was
then known as Elan Pharma International of its interest in certain
IP was treated by the Company as a trading transaction. Revenue,
after reassessing the transaction, declared it should have been
treated as a chargeable gain, which is subject to a higher tax
rate.

There has been significant public commentary on this matter
given the size of the assessment and the broad application and
significance of the tax position at issue.

AbbVie

In January 2021, it was announced that the pharmaceutical
company AbbVie was bringing a Judicial Review action against
Revenue arising from a tax liability of €587 million arising
from the takeover of the pharmaceutical company Allergen. This
action was referred to as a “precautionary measure” as
the TAC had already ruled in favour of AbbVie, reducing the tax
liability to nil, although Revenue has appealed this decision to
the High Court because it disputes the ability of the TAC to make a
ruling based on EU law.

The action taken by AbbVie relates to the introduction of a
measure in the 2020 budget that meant schemes of arrangement,
whereby shares are cancelled, would be liable for 1% stamp duty
whereas previously, such schemes would have been tax exempt. The
TAC held that the AbbVie scheme of arrangement was substantially
entered into prior to the introduction of the Finance Act 2020 and
thus AbbVie should not have been subject to this new stamp duty
charge on the cancellation of its shares.

There has been significant interest in this case given the size
of the assessment and the approach taken by Revenue in making this
assessment.

European – Court cases and EU law developments

European Commission State Aid investigation –
Apple

The European Commission decision relating to the Apple
case was published on 19 December 2016. The investigation centred
on whether Ireland allowed Apple to adopt a method of taxation that
provided it with a competitive advantage and breached EU State Aid
rules. The Commission concluded that this did occur, and ordered
Ireland to recover approximately €13 billion, plus interest,
from Apple.

In coming to its decision, the Commission focused on the
arm’s length principle and whether Ireland applied that
principle in its taxation of Apple. The two Apple entities that
were the primary focus of the decision were both non-Irish
resident, but maintained an Irish branch. Under Irish law, at that
time, only the profits derived from an Irish branch were subject to
tax in Ireland. The Commission examined the profits that, in its
view, should have been allocated to the branches under the
arm’s length principle. The profits at stake were derived from
the IP of the entities. Ireland had treated such profits as outside
the scope of Irish taxation, on the basis that the entities were
not resident in Ireland.

As part of its decision, the Commission effectively determined
that the absence of employees and verifiable activity in the head
offices meant that a significant amount of that activity should be
allocated to the Irish branches.

The EU General Court determined on 15 July 2020 that Ireland did
not give Apple illegal State Aid, so overturning the European
Commission decision. In September 2020, the European Commission
announced its intention to appeal this ruling to the European Court
of Justice.

The process could take several years before a final outcome is
reached.

Tax climate in Ireland

Ireland has a modern, open economy that attracts a significant
amount of inward investment by multinationals and financial
services businesses. Ireland has a 12.5% corporation tax rate for
trading income on a regulated investment funds regime, a
special-purpose company regime that facilitates international
financial transactions including securitisation and bond-issuance
companies, a network of over 74 double tax treaties, broad
withholding tax exemptions for outbound payments based generally on
the EU or tax treaty residence of the recipient and a participation
exemption for gains on shares.

Ireland’s approach to international tax policy is one of
full engagement, with international initiatives led by the OECD and
the EU to combat tax avoidance and increase tax transparency. As
set out above, Ireland is committed to the OECD BEPS global tax
reform process and has implemented many of the BEPS
recommendations.

Developments affecting the attractiveness of Ireland for
holding companies

The Irish tax treatment of holding companies includes a
participation exemption from capital gains, assuming certain
conditions are met, and a 12.5% rate of corporation tax that
applies to (a) dividends from other EU or treaty countries, or
countries that have ratified the Convention on Mutual Assistance in
Tax Matters, that are sourced from trading activities, and (b)
dividends from foreign portfolio companies (i.e. those in which the
Irish holding company has less than a 5% interest). Ireland also
operates a foreign tax credit system, which can eliminate or reduce
any Irish tax liability on the receipt of foreign dividends
depending on the amount of the credit.

Industry sector focus

Securitisation

Irish resident companies that hold and/or manage certain
“qualifying assets” (which includes financial assets) and
meet certain other conditions may be regarded as “qualifying
companies” for the purposes of section 110 of the TCA. The
taxable profits of such companies under section 110 of the TCA are
calculated as if they are trading entities, with the result that
they can deduct funding costs, including interest swap payments,
provided certain conditions are met. Any residual profit is liable
to corporation tax at 25%. The nature of the regime has led to its
use in a range of international finance transactions including
repackagings, collateralised debt obligations and investment
platforms. Certain changes to the regime were introduced in 2011
and again as part of the Finance Act 2019, which means that
deductibility of funding costs may be restricted where interest is
paid to certain persons.

Investment funds

Ireland offers an efficient, clear and certain tax environment
for investment funds regulated by the Central Bank of Ireland known
as the “gross roll-up regime”. As a general rule,
investment funds (which fall within the definition of an
“investment undertaking” for the purposes of section 739B
of the TCA) are, broadly, not subject to tax in Ireland on any
income or gains they realise from their investments, and there are
no Irish withholding taxes in respect of distributions, redemptions
or transfers of units by or to non-Irish investors, provided
certain conditions are met. In particular, non-Irish resident
investors and also certain exempt Irish investors must generally
provide the appropriate Revenue-approved declaration to the fund.
Irish funds should therefore only be required to withhold
investment undertaking tax on payments in respect of certain Irish
investors.

In addition, no stamp duty is payable in Ireland on the issue,
transfer, repurchase or redemption of units in a regulated Irish
fund. While Ireland has introduced a new tax regime for Irish real
estate funds (“IREFs“) holding Irish
situate real estate, which could entail additional withholding tax
arising out of certain events, including distributions to
investors, this does not affect the tax treatment discussed above
where the investment fund does not hold Irish real estate
assets.

Finally, the provision of investment management services to a
regulated investment fund is generally exempt from Irish VAT.

The enactment of the Irish Investment Limited Partnership
(Amendment) Act 2020 has significantly enhanced the Irish
investment fund offering. This legislation alongside complimentary
tax law changes has modernised and enhanced the existing Irish
investment limited partnership (“ILP“)
legislation, which is particularly applicable to private equity and
venture capital investment. The ILP is treated as tax transparent
for Irish purposes.

Aircraft leasing and aviation finance

Ireland is a global hub for aviation finance with over 50
aircraft leasing companies based in Ireland, including 14 of the
world’s top 15 lessors.

Tax reform measures introduced as part of the BEPS programme
will be relevant to this sector.

For example, as set out above, the MLI has introduced a new PPT
into certain Irish double tax treaties. This could deny a treaty
benefit (such as a reduced rate of withholding tax) if it is
reasonable to conclude, having regard to all facts and
circumstances, that obtaining that benefit was one of the principal
purposes of any arrangement or transaction that resulted directly
or indirectly in that benefit.

While tax treaty access is key for aircraft lessors given the
worldwide nature of their business, many would have substantial
operations in Ireland so it is unlikely that the new PPT test would
be an issue in that case.

ATAD’s interest limitation rule will also be a key
consideration for any aircraft lessors. Aircraft lessors have
traditionally utilised leverage to fund the acquisition of
aircraft, so a restriction could be significant on the tax
deductibility of those interest payments and lead to higher
taxes.

Real estate

IREFs are regulated Irish funds investing in Irish property and
related assets and are subject to specific tax treatment, including
a potential withholding tax that applies on distributions from an
IREF.

The Finance Act 2019 contained further changes to the tax regime
that applies to IREFs.

The key points emerging from the Finance Act 2019 are as
follows:

  1. The IREF can be subject to Irish tax if the amount of debt
    incurred exceeds 50% of the cost of its IREF assets. There is
    relief where the debt incurred qualifies as third-party debt under
    the provisions.
  2. The IREF can be subject to tax where it breaches certain ratio
    limits relating to the amount of its tax-adjusted interest expense.
    As above, there is a relief where the interest relates to debt
    qualifying as third-party debt.
  3. The IREF can also be subject to tax where its accounts reflect
    a deduction for expenses or disbursements that are not wholly and
    exclusively laid out for the purposes of its IREF business.

The tax charge is a direct tax (rather than a withholding tax)
of 20%. The computation of this tax charge is complex and will
depend upon a number of factors.

Additional anti-avoidance and compliance obligations were also
introduced. Finally, the Irish Minister for Finance has noted that
he will continue to review the tax treatment of IREFs and is open
to further legislative amendments if he perceives that the IREF
regime is being used for ongoing tax avoidance. It would not be
surprising if further changes are introduced.

Intellectual property

Ireland is a leading location for the development, exploitation
and management of IP. The 12.5% corporation tax rate on trading
income, a 25% tax credit on the cost of eligible research and
development activities, capital allowances on the cost of acquiring
certain intangible assets and a large double tax treaty network to
facilitate the flow of funds between Ireland and other countries,
are all features of the Irish tax system that are relevant to a
business with IP.

The year ahead

Ireland has a stable, competitive tax regime based on clear,
long-established rules. International business has benefitted from
this environment, hence the number of multinationals headquartered
in Ireland and major investment funds that invest through Irish
funds and investment companies.

While it is a time of unprecedented change in the international
tax environment, Ireland is keeping pace and adapting to these
developments. While Ireland remains committed to its 12.5% tax rate
and is indeed at the forefront of features such as the knowledge
development box, it has also been among the first countries to
implement OECD Country-by-Country Reporting, the MLI and other
aspects of the OECD BEPS initiatives.

In recent years, many changes, primarily motivated by the OECD
BEPS initiative and EU anti-tax avoidance measures, have been
introduced to the Irish tax landscape, including transfer pricing,
DAC6 and anti-hybrid provisions.

As we emerge into a post COVID-19 world, we do not envisage any
slowdown in the pace of change in international taxation. At
present, the Irish Government is preparing to implement ATAD’s
interest limitation rule and anti-reverse hybrid rules. Those rules
are expected to be implemented in the Irish Finance Act 2021 and to
take effect from 1 January 2022.

Meanwhile, international tax initiatives continue to be
developed and gain pace. Final recommendations on the taxation of
the digital economy were published by the OECD on 14 October 2020
under the so-called “BEPS 2.0 Project”. On 5 June 2021,
the G7 Finance Ministers and Central Bank Governors
Communiqué was published, summarising what they termed a
“historic agreement” on taxing multinationals. In this
Communiqué, the G7 emphasised their commitment to addressing
the tax challenges arising from globalisation and the
digitalisation of the economy and to adopting a global minimum tax.
In particular, they expressed a commitment to ensuring that market
countries are awarded taxing rights on at least 20% of profit
exceeding a 10% margin for the largest and most profitable
multinational enterprises. They also committed to a global minimum
tax of at least 15% on a country-by-country basis. While the final
outcome of these proposals is unknown, there can be no doubt that
further changes in the international tax landscape will be of
interest and relevance to Ireland.

Originally published by Global Legal Insights to Corporate
Tax 2021.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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