Global Tax Reform - Ireland’s ATAD and MLI implementation
Multilateral instrument ratification
On 29 January 2019, Ireland deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). The Convention will enter into force in respect of Ireland on 1 May 2019. As from that date, Ireland's treaties with Australia, Austria, France, Israel, Japan, Lithuania, Malta, New Zealand, Poland, Serbia, Singapore, the Slovak Republic, Slovenia, Sweden and the United Kingdom will be affected by the MLI. This list of affected treaties will increase as further partner countries deposit their instruments of ratification. The extent to which the MLI will modify Ireland's bilateral tax treaties will depend on the final adoption positions taken by other countries.
ATAD consultation on anti-hybrid rules and interest limitation rules
The Irish Government consultation on ATAD with respect to anti-hybrid, anti-reverse hybrid and the interest limitation rules closed on 18 January 2019. ALG has input into the consultation exercise noting, among other matters, that:
(i) anti –hybrid rules
- Irish regulated funds and 'public ' securitisations, loan origination SPVs etc. that are excluded from the section110 'specified mortgages' deductibility restrictions should be excluded from the scope of the anti-hybrid rules.
(ii) interest limitation rules
- the Government position of deferring the implementation of the interest limitation rules to 2024 should remain unless there is a clear decision that Ireland's existing rules are not "equally effective";
- there should be grandfathering of loans entered into before 17 June 2016;
- orphan structures should be recognised as stand-alone entities; and
- the concept of 'financial undertakings' should cover subsidiaries of regulated entitles as well as the regulated entity itself.
Ireland's Corporation Tax Roadmap
In September the Minister for Finance published Ireland's Corporation Tax Roadmap. The Roadmap outlined Ireland's actions to date in the context of the changing international tax environment. It also set out the next steps in Ireland's implementation of the various commitments it has made through EU Directives and the OECD BEPS reports. The Roadmap signposted the following:
- CFC rules (BEPS Action 4 & ATAD Article 4) – CFC legislation has been introduced by Finance Act 2018 with effect from 1 January 2019 (see below)
- On January 29 2019 Ireland became the ninteenth country to deposit its instrument of ratification of the MLI. It will enter into force in respect of Ireland on 1 May 2019
- Multilateral Instrument (MLI) (BEPS Actions 2, 5, 6, 14 & 15) – the final legislative steps required to allow Ireland to complete ratification of the MLI were taken in Finance Act 2018 and Ireland deposited its instument of ratification on 29 January 2019
- Interest limitation rules - while Ireland had taken the position that it already had equally effective domestic interest limitation rules and could delay implementing these new ATAD rules until 2024, it is also examining options to bring forward the transposition to 1 January 2020, at the earliest
- Transfer pricing rules (BEPS Actions 8-10 & 13) – legislation will be introduced in Finance Bill 2019 to update Ireland's transfer pricing rules
- Mandatory disclosure rules (BEPS Action 12 & DAC 6) – legislation will be introduced in Finance Bill 2019 to ensure Ireland has fully implements the DAC 6 Directive
Exit tax rules
ATAD requires Member States to introduce an exit tax for corporates in certain situations (e.g. transfers to Member States and third countries). Broadly, the 'recipient' Member State is to accept the value determined by the exit tax State as the base cost of the transferring assets for tax purposes. Ireland already had an exit charge provision that applied capital gains tax to companies moving their residence outside Ireland although that was subject to certain widely used exceptions. ATAD does not provide however for those exceptions.
While a derogation in the ATAD allows for the deferral of the exit tax regime to 1 January 2020, the Minister for Finance introduced the regime from midnight on 9 October 2018. The Minister introduced the measure earlier than expected with a view to providing certainty to businesses currently located in Ireland and considering investing in Ireland in the future.
The exit tax regime will tax unrealised capital gains where companies migrate or transfer assets offshore such that they leave the scope of Irish tax. More particularly the tax applies in the following circumstances:
- a company tax resident in a Member State (excluding Ireland) transfers assets from an Irish permanent establishment (PE) to its head office or PE in another territory;
- a company tax resident in a Member State (excluding Ireland) transfers a business (including the assets of the business) carried on by an Irish PE to another territory; or
- a company ceases to be Irish tax resident and becomes tax resident in another territory.
The tax rate is set at 12.5% in line with Ireland's competitive corporation tax rate for trading profits. An anti-avoidance measure increases the rate to 33% where the event giving rise to the exit tax arises as part of a transaction to dispose of the assets with the purpose of securing the lower 12.5% rate. The exit tax does not apply in certain situations, e.g.:
- on migration of a company where the assets are situated in Ireland and continue to be used as part of a trade in Ireland or are used or held by an Irish PE;
- where assets are transferred temporarily outside Ireland for certain financial services transactions.
To view our exit tax applicability decision tree click here.
Controlled Foreign Company (CFC) rules
As flagged in Ireland's Corporation Tax Roadmap, Finance Act 2019 introduced new CFC rules in line with ATAD requirements. The rules apply for accounting periods beginning on or after 1 January 2019.
CFC rules are an anti-abuse measure targeted at the diversion of profits to offshore entities in low or no tax jurisdictions. The basic premise of CFC rules is to attribute certain undistributed income of the offshore entity to its controlling parent and taxing same. Broadly, an entity will be a CFC where it is (i) subject to more than 50% control by a parent company and its associated enterprises and (ii) tax on its profits account for less than half the tax that would have been paid had the income been taxed in parent company's country of tax residence.
ATAD allows Member States to determine whether the income of a CFC should be attributed to its parent using one of two options. Ireland has opted for option B. Option B attributes undistributed income arising from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage. It focuses on bringing income that is artificially diverted from Ireland to a low tax jurisdiction back into the Irish tax net.
To view our CFC rules applicability decision tree click here.
For more informationplease contact a member of the A&L Goodbody Tax team.
Date published: 18 February 2019