© irish tax institute 2011 advanced business taxes lecture 3

© Irish Tax Institute 2011

Advanced Business Taxes

Lecture 3


ABT – Lecture Plan

27 November Chapters 8-9 inclusiveTaxation Issues Inbound to IrelandTaxation Issues Outbound from Ireland


ABT – Lecture Goals

Understand basis of Irish chargeIdentify Irish tax issues on repatriation of profits from Ireland including migrationUnderstand and apply the Irish tax treatment on inbound interest/royalties, foreign branch profits and dividends from both Treaty and non-Treaty jurisdictions to include Irish taxation and credit for foreign taxes Understand and apply Irish participation exemption regime for chargeable gains Compare and contrast branches, subs and representative offices Understand key relief available for intra-group financing including associated anti-avoidance provisions


Recap on Last Week - Quiz

Name three scenarios where Irish legislation, EU Directives and Double Tax Treaties may interact

Give the specific legislative references Why would you rather go for EU Directive Relief

as apposed to domestic or treaty relief? How do the conditions for domestic, treaty or EU

directive relief vary? Name 4 ways a company can avoid withholding

tax on interest?


Recap on Last Week - Quiz

What is meant by transfer pricing? Name 5 methods for determining transfer price? What is a correlative adjustment Describe any transfer pricing provisions of a

double tax treaty? Give 5 examples of a branch and 3 examples of a

non-branch activity What is meant by “thin capitalisation” Name three ways a double tax treaty can relief

income from double tax?


International Tax

Chapter 8

Taxation Issues for companies setting up in Ireland

(Inbound investment)


Companies coming to Ireland

How is a company coming to Ireland taxed?– Is it opening a branch in Ireland, creating a new

subsidiary in Ireland or migrating its residence to Ireland?

– What type of income will it have? Trading, non trading (Noddy), receipt of interest, royalties, dividends, chargeable gains?

– What is the taxation in Ireland but also what withholding tax will apply on the repatriation of this profit abroad?

– In what way is the income relieved from DT?


Repatriation of Profits from Ireland

Key tax issue prior to investment is tax efficiency of profit repatriation – what is the tax cost of bringing profits “home”?

Profit repatriation encompasses interest, royalties, dividends, capital distributions – can also include arm’s length recharging for services rendered

Marginal taxation can arise due to Higher rates of tax in home jurisdiction and/or non-

availability of credit for Irish tax (including underlying tax in case of dividends)

Un-creditable WHT suffered/ domestic exemption such that WHT final tax cost


International TaxationRecap – Basis of Charge

S.26(1) – Irish Res Co chargeable to CT on worldwide profits - income and chargeable gains

S.25(2) – Non-resident Co with Irish branch/agency chargeable to CT in respect of

trading income from the branch/agency (non-trading branch income outside of scope of corporation tax)income from property of the branch/agencychargeable gains from disposal of branch/agency assets

Non Irish resident Co with no Irish branch/agency chargeable to Irish income tax on Irish source income and chargeable to CGT on disposal of specified assets (S.29)


Ireland as jurisdiction to repatriate profits from

Consider a structure such that foreign company lends to Irish operation or licences IP to Irish operation

Interest or royalties paid to foreign company – repatriation of profits before corporation tax!

Is it caught by domestic Transfer Pricing rules – Sec 835C– Applies to trading transactions

– Does not apply to “grandfathered transactions”


Repatriating Profits Abroad - Cont’d

What about withholding tax? General rule – Income Tax withheld 20%

– Interest paid S246– Royalties S238

WHT due with Preliminary Tax


Interest and Royalties - Withholding Tax exemptions

S.246(3)(h) - exemption from WHT on trading interest to Treaty residents No exemption on payments to domestic non-banking Irish Co unless covered by 51% group exemption S410 S.242A – FA10 amendment extends same treatment to patent royalties made to Treaty residents in the course of trade/business Extensive exemptions from DWT per S.172D In absence of domestic legislative exemption – DTA provides for lower/nil rate of WHT on dividends, interest and royalties Interest and Royalties DirectiveLegislative exemption preferred due to absence of Treaty clearance procedures – changes in this


Withholding Tax exemptions (cont’d)

Form VC3 previously required certificate from the auditor of the non-resident company certifying that it is not controlled by Irish residentsFinance Act 2010 has removed this requirement and instead DWT exemptions now apply in accordance with a self-assessment system. The declaration will endure and cover future dividends for a period of up to six years after which a new declarationNote WHT exemption in Interest and Royalties Directive


Repatriation of Profits by way of dividend

No deduction for CT purposes in Ireland, hence interest and royalties more favourable

Dividends are extremely widely defined DWT applies unless domestic exemptions, (see s172)

EU Parent Sub or treaty exemption applies

Are dividends treated as trading or non trading income for recipient in home country?

Is credit given in home country for WHT applied in Ireland?


Repatriation of Profits from Ireland

Repatriation also includes S.583 capital distribution – redemption, share buy-back, distribution in course of winding-up

Capital distribution different from an income distribution S.130(1) => DWT n/a

Capital distribution = a reduction in capital of the company – difficult from a legal perspective

Capital distribution = CGT event, are the shareholders subject to CGT?

Repatriation also achievable through migration of Irish sub out of charge to Irish tax – migration may be preferable in certain circumstances to distribution/liquidation


S.627 – 629 CGT Exit Charges on Migration

S.627 CGT Exit Charge on Migration - Company ceases to be Irish resident – deemed sale & reacquisition of all assets subject to certain key exemptions Allowable loss offset against allowable gains – net gain chargeableExit charge n/a to “Excluded Companies” – 90% controlled by company under control of EU/Treaty residents (not Ireland)Exit charge n/a where assets continue to constitute Irish branch assets (“specified assets”) See Task 8.2



S.628 Election to postpone gain where Migrating Co 75% Sub of Irish resident Co – deferred gain crystallises to the Irish parent if within 10 years:

MigratingCo sells any of the assets with deferred gainMigratingCo ceases to be a 75% sub of the Irish resident Parent or the Parent ceases to be Irish resident

S.627/628 Tax unpaid within 6 months recoverable from Co which was 75% group member in 12 month period to migration, or Controlling Director (S.432)

Tax recoverable within “specified period” – 3 years after end of relevant chargeable period



Migration to non EU/EEA country will result in migrating company ceasing membership of Irish CGT group

S.623 clawback of CGT group relief where migrating Co leaves CGT group with asset within 10 years of relieved transfer S.623 clawback should result in uplifted base-cost for purposes of S.627 chargeS.627 exclusions not available for S.623 charge Migration should not affect association for stamp duty clawback purposes


International Tax

Chapter 9

Taxation Issues Companies expanding outside of Ireland

(Outbound from Ireland)


Company expanding from Ireland or using Ireland as HoldCo

location

What type of income will they receive Foreign trade Case III or Case I Repatriating profits from foreign operations

– How? - Interest, Royalties, Dividends, Capital Distributions

– Irish Domestic exemptions from WHT not applicable

– What are foreign domestic WHT rules

– Does Tax Treaty or EU Directives offer any relief?

– Does our domestic unilateral credit relief apply?


Interest/Royalties

Interest/royalties taxable at 12.5% trading income, 25% passive DTA usually provides that interest/royalties taxable in country of residence only unless connected with PE in other countryRoyalty payments may not fall within narrow definition in some Treaties such that WHT applies Where WHT correctly suffered under DTA credit relief available per Sch24Non-Treaty – unilateral relief for trading interest/royalties per Sch24 9D, 9DB


Interest/Royalties – Credit Relief – trading income from DTA Country –

Sch 24, para 4

If royalty/interest arising from DTA country and is trading income use – P X I/R turnover basis applies per Sch24, para. 4See pg 147 manual

Gross foreign income adjusted using “Turnover basis” to calculate “Irish measure of foreign income” <referred to as “Relevant Income”>


Interest/Royalties – Credit Relief

Relevant income = P x I/RP= the amount of net profits of the trade before any deduction for foreign taxes not allowed as a

credit (i.e. net taxable Case I profits pre deduction for uncredited tax)

I = “that income” (the foreign income on which the foreign tax was suffered) before deducting

any expenses (i.e. gross foreign income)R= the total amount receivable by the company in the period in the carrying on of its trade (i.e.

Case I Turnover)



Practical approach to foreign tax credit relief calc:-Gross up Net Foreign Income (Relevant Income Less Foreign Tax) at lower of Irish effective rates and Foreign effective rates <foreign effective rate = foreign tax/relevant income>

Credit = Grossed up NFI X Lower Effective RatesFull Credit where FER < Irish effective rate (12.5%),FER > Irish effective rate – tax deduction for uncredited tax


Understanding Interest/Royalty Credit Relief

Sch 24(4) See example 9.1 Say Royalty received = 40k Say tax withheld on Royalty = 4k Say total profits in IreCo = 100k Say total Turnover in IreCo= 800k Royalty is deemed to contribute 5k to profits of Irish Co. Royalty forms part of trading income – trade expenses would have

occurred, hence reduction to deemed Irish Measure Income! Actual tax withheld was 4k. Effective tax rate 80%. Regross 1k at lower

of Irish and Foreign ETR = 1.143k. Credit is given for 1.143k, Deduction for 3,857k


Interest – Credit Relief – trading interest from Non DTA Country – Sch

24, para 9D

Calculate A – use normal method (sch 24 para 4)

Calculation B - Foreign Tax x 87.5% Credit relief based on lower of A&B



Onshore “pooling” for trading interest only per Sch24,9F subject to 25% relationship – no pooling for royalties Uncredited foreign tax on interest offset against Irish CT on similar Case I trading interest – no provision for carry forward (as distinct from pooled dividends)Part of Excess Credit relieved by deductionExcess credit for pooling = (100% – 12.5%) X Excess Credit (Sch 24, Paragraph 9 (3)(b))Example 9.2



Non-trading interest/royaltiesTreaty relief only – no unilateral reliefIrish measure foreign income is the foreign interest/royalty – no adjustment required – its not Case 1 income! No pooling for un-credited foreign tax


Foreign Branch Profits

Credit in Ireland for foreign branch profits under DTA per Sch24Sch 24, 9DA – unilateral credit relief to IrishCo for foreign tax on foreign branch profitsSch24, 9FA - pooling of unrelieved foreign branch tax against other foreign branch income – FA10 amendment provides for carry forward unrelieved tax Irish Measure Foreign Income (IMI) – Irish taxable profits on basis profits were calculated under Irish tax principles => Sch24, 4.(2A) [P X I/R] Turnover Basis not used Use of Irish basis generally results in different FER to actual rate of foreign tax=> FER = foreign tax/IMI See examples Pg. 166


Inbound Dividends – Domestic Taxation

Prior to FA08 inbound dividends taxable under Case III @ 25%FA08 introduced S.21B arising from UK FII GLO case => aim to ensure that EU source dividends not subject to higher rate of taxation than domestic dividends contrary to Freedom of Establishment principle Domestic effective rate may be lower than 12.5% on underlying profits – EU source dividends now at effective 12.5% => still contrary to EU law???Election to tax inbound dividends from EU/DTA resident sub paid out of “trading profits” as definedNEW FA2010 extended 12.5% CT to dividends paid from trading profits of non DTA public co’s


Trading Profitsprofits from carrying on a trade (exclude “excepted trade”) dividends received out of trading profits (traced through EU/DTA)Mixture – pro-rating required subject to 75% test

Dividends flowing through non-EU/DTA lose their trading character Dividend from <5% shareholding deemed paid out of trading profits – 12.5% where Case III, exempt where trading Case I



All dividend deemed to be paid out of trading profits where

75%+ sub profits are trading profits, and75%+ assets of group are trading assets

Relevant trade charges offsettable against S.21B 12.5% dividends – S.243A(3)(c)Relevant trading losses offsettable against S.21B 12.5% dividends – S.396A(3)(c) Group relief relevant trading losses and excess relevant trade charges against S.21B 12.5% dividends – S.420A(3)(a)(iii)



Dividends potentially suffer two layers of taxationUnderlying tax – tax on the profits out of which dividend paid Dividend Withholding tax

DTA usually limits level of DWT depending on % shareholding, e.g. UK DTA – max 15% WHT, reduced to 5% with 10%DTA imposes minimum shareholder requirement to avail of credit relief for underlying tax, e.g. Art.21(b) UK DTA imposes min. 10% voting power

Inbound Dividends – Credit Relief under DTA


Limited no. of DTAs allow relief for underlying tax to “portfolio” investors (<10% issued share capital) Belgium, France, Germany, Italy, Japan, Lux, =>

Revenue provide sample effective tax rates for these jurisdictions (incl. WHT & underlying tax)– open to taxpayer to calculate actual instead (See

TB67)Cyprus, Pakistan, Russia & Zambia – taxpayer

must calculate actual effective tax rate

Inbound Dividends – Credit Relief under DTA


Bowater principle => Irish measure of foreign income (IMI) (aka “relevant income”) in case of dividends is

accounting profits before tax (not tax adjusted profits)

Foreign Effective Rate =

Actual ForeignTax (i.e. DWT + % Underlying Tax)% Accounting Profits before tax

Need to pro-rate accordingly where not all profits distributed and/or not 100% shareholding

See Task 11.4 (change to eg 9.6)

Inbound Dividends – Credit Relief


Sch24, 9A – unilateral credit relief for WHT and underlying taxes on dividend income from 5% Sub – also applies to EU Co with Irish branch receiving dividend

Unilateral relief applies where no DTA or requirements for credit relief under DTA not met (e.g. % shareholding)

Sch 24, 9B – same relief as 9A for underlying tax borne by lower tier companies

Relief is granted in same manner as per Treaty – Sch. 24 provisions apply

Inbound Dividends – Unilateral Credit


Inbound Dividends – Onshore Pooling Sch24, 9E

Relief for un-credited foreign tax on inbound dividends – available for offset against Irish tax arising on other inbound dividends - see example 9.7Excess credits available for offset against other foreign dividends in AP, unutilised c/f for offset in future APPart of Excess Credit relieved by deduction=> Excess credit for pooling = (100% – Tax Rate%) X Excess Credit (Sch 24, Paragraph 9 (3)(b))Restrict tax credit to 75% or 87.5% as appropriate


Inbound Dividends – Onshore Pooling Sch24, 9E

Excess tax credit arising on 25% dividend received from 5% Sub (direct or indirect) may be claimed against CT arising on any other such inbound dividend (either 25% or 12.5%) See example 9.8Excess tax credit arising on S.21B 12.5% “relevant dividend” offsettable only against CT arising on 12.5% “relevant dividend”Consider mix of foreign dividends before 12.5% election => may be preferable not to elect – see 9.3.4 pg 166Unused credits available for carry forward indefinitely – 12.5% excess credits ring-fenced


Participation Exemption – S.626B

“Participation Exemption” An exemption from CGT on disposal of shares in

Qualifying Subs ParentCo - Min 5% of OSC, Profits & Assets for

continuous 12 month period at any time during 2 years period up to date of disposal => no requirement for 5% at date of disposal

SubCo – EU/DTA Resident, and business of SubCo consists wholly or mainly of the carrying

on of one or more trades, or taken together, the businesses of HoldCo and all SubCos

which meet resident/holding period test consist wholly or mainly of the carrying on of one or more trades.


Participation Exemption – S.626B

“Wholly or mainly” – no guidance, >50% total profits, assets or turnover

S.626B(3) – exemption N/A to disposals of shares deriving greater part of value from

land/minerals in State, ng/nl transactions per S.617 Deemed disposals on migration per S.627

S.626C – extends S.626B to assets related to shares, e.g. options & other rights to acquire shares

No loss relief where S.626B applies Dividends from SubCo not treated as investment

income for CCS purposes where S.626B applies – excl FII


Chargeable Gains – Sch24, 9FB

Many DTAs provide that disposal of shares taxable in country of residence only except where greater part of value derive from land/buildings in other jurisdiction

Gain chargeable in both countries Credit relief under DTA – use Irish measure of

gain to calculate FER Unilateral relief where CGT suffered in

jurisdictions covered by DTAs which exclude CGT (pre 74 Treaties), e.g. France, Germany, Netherlands


Branch, Sub or Rep Office?

Company and branch treated as same legal entity for Irish tax purposes (Irish co with foreign branch or foreign co with Irish branch)

Other jurisdictions may treat Company and branch as separate entities for tax purposes, e.g. Luxembourg

Irish branch of foreign co does not prepare own financial statements – Foreign Co required to file Form F7, P&L, BS, Directors and Audit report including consolidated accounts with CRO

Foreign branch of IrishCo – financial statements include branch profits => full profits taxable in Ireland with credit for foreign tax. Domestic provisions of foreign jurisdiction may require separate branch accounts



Branch IrishCo liable to branch profits as earned – credit

relief (DTA, unilateral relief) for foreign tax suffered

Transactions between branch and IrishCo ignored (includes for TP purposes) – Treaty imposes arm’s length pricing

Branch losses form part of IrishCo profits – immediate relief

Foreign tax base and Irish tax base may differ – consider in context of FER



Subsidiary Ensure foreign tax residence Irish Parent liable to tax on sub profits when

repatriated– credit for WHT and underlying tax (DTA, unilateral relief)

No loss relief in Irish Parent for foreign sub unless S.420C applies

Entitlement to S.626B relief on future sale Irish sub of foreign parent – consider foreign

CFC rules



Representative office is merely an office in foreign jurisdiction with no authority to bind the company –

should not constitute a PE (branch or agency) No taxable presence in local jurisdiction – may be

requirement to apply PAYE where employees are carrying out duties in domestic jurisdiction

Nature of representative office is that no profit attributable to it (even where foreign Revenue

authority argues that it is a PE under


Relief on Intra-group Financing

Qualifying interest per S.247 deductible as a charge on income per S.243(8)S.247 used to finance acquisitions, fund subsidiaries, restructure groups by way of debt/equity – including non Irish resident subs Detailed conditions to be metDetailed anti-avoidance provisions re interest on intra-group loans (not equity) Comprehensive recovery of capital rules – S.249Remember general rules re interest deductibility on trading account, rental account


Relief on Intra-group Financing

S.247(2) Interest on a loan used to:- Acquire shares in a Trading/Rental Co or a

HoldCo of a Trading/Rental Co Lend to Trading/Rental Co or a HoldCo of a

Trading/Rental Co where proceeds used wholly & exclusively for purposes of their trade/ trade of ConnectedCo

Repay loan which was applied for either of these purposes

Note: S.248 for individuals – no relief for interest on loan to RentalCo


Relief on Intra-group Financing – S.247(3) Conditions

Investing Co must have Material Interest (>5% OSC) in Investee Co or a ConnectedCo

Common Director throughout period from loan application to interest payment

No recovery of capital in period – interest relief restricted pro-rata per S.249

Interest relief allowed on a paid basis Loan proceeds cannot have been applied for

some other purpose prior to being used as per S.247(2)


Relief on Intra-group Financing – S.249 Recovery of Capital

Interest deduction restricted pro-rata where Investing Co (borrower) recovered or deemed to have recovered

capital from Investee Co or ConnectedCoApplies to capital recovered during the period from

the application of the proceeds of the loan until interest paid or within the period beginning 2 years before the loan proceeds were invested, unless capital recovered

used to acquire shares/lend money qualifying for relief per

S.247(2), orrepay another loan qualifying for S.247 relief


Relief on Intra-group Financing – S.249 Recovery of Capital

Deemed recovery of capital per S.249(2) InvestorCo receives consideration for the sale/repayment of OSC of InvesteeCo or company connected with InvesteeCoInvestee Co or ConnectedCo repays any loan from the InvestorCoInvestorCo receives consideration for the assumption of a debt due from InvesteeCo or a ConnectedCo


Relief on Intra-group Financing – S.249

Recovery of CapitalInvestorCo acquires shares in Holdco which holds shares in TradeCo/RentalCoInvestorCo deemed to have recovered capital where Holdco itself recovers capital from a 51% TradeCo/ RentalCo Sub unless capital used to

repay a loan made to it by InvestCo;redeem shares held by InvestorCo; OR acquire shares in TradeCo/CaseVCo or repay another S.247 loan

More than one InvestorCo – apportion deemed recovery between InvestorCos pro-rata to amount subscribed/lent (S249(2)(a)(iii))


Relief on Intra-group Financing – Anti-avoidance S.247(4A)

Internal Debt

Targets “internal debt” transactions – related-party borrowings to acquire OSC in ConnectedCo creating deductible interest

charge Applies to borrowings on/after 2 Feb 06

S247(4A)(a) – applies where loan advanced from connected party, and

to acquire share capital or lend money ultimately used to acquire share capital

of connected company


Relief on Intra-group Financing – Anti-avoidance S.247(4A) Internal

Debt

S247(4A)(b) –applies where third party borrowings financed back-to-back from related-party assets to

circumvent S247(4A)(a) S.247(4A) related party interest restriction N/A to

Third-party borrowings (for OSC/loan) – provided not back-to-back arrangement

Interest on replacement pre 2 Feb 06 borrowings

Interest on related party borrowings used to acquire share capital of Unconnected Co

Interest on related party borrowings to lend to group company for trading purposes


Relief on Intra-group Financing – Anti-avoidance S.247(4A) Internal

Debt

S.247(4A)(c) – no restriction where related party borrowings used to acquire newly

issued OSC where share capital used for trade/business

S.247(4A)(d), (e) & (f) – no restriction on interest from related party borrowings to

acquire OSC to extent investment generates taxable income

See examples Pg. 190+


Anti-avoidanceOutbound Investment

S.590 Attribution of Gains – see Part 2 material S.129A – anti-avoidance provision which taxes

dividends from Irish sub under Case IV where profits earned while sub non-Irish resident

Applies only where sub controlled by Irish residents (at any time) before migration

Applies to sub which becomes Irish resident after 3 April 2010

Applies to dividends paid in 10 year period post migration

Schedule 24 DTA relief available


Recap

Repatriation out of Ireland– Does WHT apply: domestic, EU and DTA relief– Repatriate by dividends, interest, royalties

capital distribution– Caught by Transfer pricing

Repatriation into Ireland– How is income taxed, what rate?– What relief is given, DTA or unilateral– How is relief calculated


Recap

How is double tax relief calculated on– trading royalties– non trade interest– Branch profits

What is Bowwater principle? When is interest incurred on borrowings

for intra-group transactions tax deductible? What is meant by “participation exemption”


Legislative References

S25 Non residents, S26 Charging section S29 CGT non residents S627 Deemed disposal of assets (exit charge) S628 Postponement of exit charge under S627 S629 Tax on non resident Co recoverable from resident

member or director S626B Participation exemption Schedule 25A S247 Interest as a charge S249 Recovery of capital rules S129A post migration Divs



Schedule 24 Credit relief Para 4 Basis for determining max amount of credit

Interest Para 9 D unilateral credit relief (includes non DTA) for

trading interest Para 9 F- onshore pooling of foreign credit (not for

royalties) Para 7 deduction for foreign credit where not trading

Royalties Para 9 DB unilateral credit relief (DTA only) for trading R Para 7 deduction for foreign credit where not trading



Foreign branch profit Para 4 (2A) not to use t/o basis, use Irish calc of foreign

tax Para 9 DA unilateral credit relief for foreign tax Para 9 FA- onshore pooling of foreign credit

Dividends Para 9 A unilateral credit relief for WHT and underlying

tax from 5% subs (includes non DTA) Para 9 B extends credit for WHT aand underlying tax for

lower tier subs Para E onshore pooling of foreign credit


Past Questions

Autumn 08, Q6, 6 marks (pg 328) format of structuring overseas, branch v sub

Summer 2009, Q4(a), 8 marks S247, 4(c)div from foreign sub

Summer 2009, Q5, 7markss, pg355, Dividends from foreign sub calculate credit

Summer 09. Q6 Pg356

Summer 2010,Q1, full question, Pg 418, Branch v sub, overseas set up, CFC, TP, Thin Cap

Autumn 2010, Q1, Full Question, P446, tax treatment of inbound and outbound divs, S247

Autumn 2010, Q3 (b), pg 449, WHT on payment of interest


Past Questions

Autumn 2010, Q4, full question –P451 S21 and calculation of credit on inbound divs

Summer 2011, Q4(b)(ii), 6 marks, Participation exemption & schedule 25A

Summer 2011, Q6(a) WHT on royalty payment to China (theory)

Autumn 2011, Q1(i)6 marks calculate credit on foreign divs,

Autumn 2011, Q3(a)(i), 5marks, exit charge, 3(a)(ii), 3 marks , participation exemption


Preparation for Lecture 4

Read Chapters 10-12 inclusive Work through examples in chapters 8 & 9

© irish tax institute 2011 advanced business taxes lecture 3

Documents

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