The concept of ‘fiscal unity’ or consolidated group tax does not exist in Ireland. However, trading losses computed for tax purposes may be offset on a current-period basis against taxable profits of another group company. As with loss relief in a single company, the amount of losses required to shelter the income is dependent on the tax rate that would have been applied to the income in the absence of the loss relief.
A group consists of a parent company and all of its 75% subsidiaries, with all group members being tax resident in Ireland, in another EU member state, in an EEA state with which Ireland has a DTT, or in another country with which Ireland has a DTT. It is also possible to trace through companies quoted on certain recognised stock exchanges (or 75% subsidiaries of companies so quoted). Non-Irish members may only surrender losses from activities that would, if profitable, be subject to Irish tax.
Both the claimant company and the surrendering company must be within the charge to Irish corporation tax. To form a group for corporation tax purposes, both the claimant company and the surrendering company must be resident in an EU country or an EEA country with which Ireland has a DTT (‘EEA treaty country’). In addition, one company must be a 75% subsidiary of the other company, or both companies must be 75% subsidiaries of a third company. The 75% group relationship can be traced through companies resident in a ‘relevant territory’ being the EU, an EEA treaty country, or another country with whom Ireland has a DTT. In addition, in determining whether one company is a 75% subsidiary of another company for the purpose of the group relief provisions, the other company must either be resident in a ‘relevant territory’ or quoted on a recognised stock exchange.
Capital losses cannot be surrendered within a group.
Relief from capital gains tax is available on intra-group transfers of capital assets. Where a capital asset is transferred from a resident company to another resident company in a 75% group, no capital gains tax charge arises. A group, for capital gains tax purposes, consists of a principal company and its 75% subsidiary companies. A 75% subsidiary is defined by reference to the beneficial ownership of ordinary share capital, owned either directly or indirectly. A capital gains tax group can include companies resident in an EU member state or an EEA DTT country for the purpose of analysing the beneficial ownership of a company.
It also is possible for an Irish resident company and an Irish branch of an EEA company in the same group to transfer capital assets without crystallising a capital gains charge, provided the asset transferred remains within the scope of the charge to Irish capital gains tax.
Subsequent to an intra-group transfer, a charge to capital gains tax will arise when either:
- the asset is sold outside the group, in which case the tax is calculated by reference to the original cost and acquisition date of the asset when first acquired within the group, or
- a company owns an asset that was transferred by a group company and subsequently leaves the group within a ten-year period of the intra-group transfer. The gain on this intra-group transfer crystallises and becomes payable at this point.
Cash pooling and treasury activities
Ireland is a popular location for cash pooling and treasury activities, with a large number of multinationals centralising intra-group treasury activities to avail of the low corporation tax rate of 12.5%. To further enhance the attractiveness of Ireland as a treasury location, Irish tax legislation contains specific provisions to facilitate cash-pooling activities and ensure favourable tax treatment of ‘short’ interest for tax purposes. Under a typical cash pool arrangement, interest payments by the Irish cash-pool leader typically would constitute 'short' interest for tax purposes because of the overnight/short-term nature of these arrangements.
Short interest is generally regarded as interest on a loan/deposit where the term is less than a year. Essentially, the Irish company will be entitled to a tax deduction for the interest payable to any group company resident outside the European Union in a non-treaty country, provided the recipient country taxes foreign interest income at a rate equal to or greater than the Irish corporation tax rate of 12.5%. If the recipient country taxes foreign interest at a rate of less than 12.5%, then relief will be given in Ireland at that effective tax rate. If the recipient country exempts foreign interest, then no interest relief will be available in Ireland. It should be noted that this will affect not only cash-pooling operations but all forms of short-term lending (i.e. less than one year). A tax deduction for interest payable to a group company resident in the European Union or in a country with which Ireland has a DTT is also available, regardless of the rate at which the foreign country subjects that interest to tax.
The transfer pricing legislation endorses the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and adopts the arm’s-length principle. The regime applies to (most) domestic as well as international related-party arrangements.
The transfer pricing rules extend to most non-trading and certain capital transactions (including the computation of certain capital allowances and charges where the transaction value is greater than EUR 25 million) between related parties.
With effect from 1 January 2023, the legislation has been updated to make reference to the 2022 version of the OECD Transfer Pricing Guidelines.
With respect to intra-group loans, in addition to ensuring that interest rates must be priced in accordance with the arm’s-length principle, multinational enterprises (MNEs) must be able to demonstrate that the debt capacity of the borrower and serviceability tests have been considered. This is relevant for any interest deductions taken from 2020 onward, regardless of when the loan originated, and is in line with the OECD’s additional guidance on financial transactions.
An exemption from Irish transfer pricing rules for small and medium enterprises has been maintained. However, the legislation has been modified such that limited scope documentation requirements are outlined for medium-sized enterprises. These requirements will not come into effect until a Ministerial Order is issued. Broadly speaking, small enterprises include enterprises employing less than 50 people and that have either a turnover of less than EUR 10 million or assets of less than EUR 10 million. Medium-sized enterprises include enterprises employing less than 250 people and that have either a turnover that does not exceed EUR 50 million or assets that do not exceed EUR 43 million.
The rules confer a power on the Irish tax authorities to re-compute the taxable profit or loss of a taxpayer where income has been understated or where expenditure has been overstated as a result of certain non-arm’s-length arrangements. The adjustment will be made to the Irish taxable profits to reflect the arrangement had it been entered into by independent parties dealing at arm’s length.
Enhanced transfer pricing documentation requirements were introduced for fiscal years beginning on or after 1 January 2020, placing an obligation on taxpayers to prepare Master File and Local File reports in accordance with Chapter V of the OECD Transfer Pricing Guidelines.
In order to manage and mitigate the compliance burden, the Master File and Local File requirements are subject to certain de minimis thresholds. The revenue-based thresholds set out in the legislation are as follows:
- A Master File must be prepared where total consolidated global revenues of the MNE group are EUR 250 million or more in the chargeable period.
- A Local File must be prepared where total consolidated global revenues of the MNE group are EUR 50 million or more in the chargeable period.
The legislation specifies that where the relevant revenue thresholds are met, transfer pricing documentation must be prepared no later than the date upon which the annual tax return for the chargeable period concerned is filed (i.e. Irish companies within the scope of the enhanced transfer pricing documentation rules with a 31 December year-end will be expected to prepare and finalise their transfer pricing documentation for that financial year by 23 September of the following calendar year). Transfer pricing documentation must be provided to Irish Revenue within 30 days of a written request.
A penalty regime has also been introduced for non-compliance with the transfer pricing documentation requirements. Applicable compliance penalties are either EUR 4,000 or EUR 25,000, depending on the taxpayer's turnover (i.e. larger taxpayers subject to the EUR 25,000 penalty are those with consolidated group turnover of EUR 50 million or more). Larger taxpayers will also be subject to a daily penalty of EUR 100 a day for each day the documentation remains outstanding.
Where the taxpayer prepares contemporaneous transfer pricing documentation that demonstrates a reasonable effort to comply with the transfer pricing legislation and it is provided to the Revenue Commissioners on a timely basis (i.e. within 30 days of request), there is protection from tax-geared penalties in the careless behaviour category in the event of a transfer pricing adjustment.
For accounting periods commencing before 1 January 2020, Irish Revenue issued guidance to taxpayers on a simplified approach to low-value, intra-group services. For accounting periods commencing on or after 1 January 2020, this guidance is replaced by Chapter VII of the OECD Guidelines, allowing a taxpayer to apply the simplified approach for low value-adding intra-group services (as defined in Chapter VII). With this simplified approach, a mark-up of 5% can be applied to the relevant costs without the need for a benchmark study to be carried out by the taxpayer to support this rate. Transfer pricing documentation supporting the arrangement should be prepared.
As mentioned above, the transfer pricing rules were extended to most non-trading transactions with effect from 1 January 2020. Section 835E provides for relieving measures that, in effect, disapplied the transfer pricing rules for certain non-trading 'Ireland-to-Ireland' transactions. These new measures work to achieve a clear policy aim of excluding certain bona fide non-trading 'Ireland-to-Ireland' transactions from the scope of the transfer pricing rules.
Attribution of profits to a branch or PE
Ireland introduced the application of the Authorised OECD Approach (AOA) to the attribution of income to a branch of a non-resident company operating in Ireland for chargeable periods commencing on or after 1 January 2022.
Transfer pricing rules and branch-specific documentation requirements (including associated branch-specific penalty and penalty protection regimes) were also extended to Irish branches and PEs (with some limited exceptions).
Advance Pricing Agreement (APA) program
Ireland has a bilateral APA program that applies to transfer pricing issues (including the attribution of profits to a PE). The program does not cover cases involving the determination of the existence of a PE.
APAs will be granted for a fixed period of time, typically between three and five years, and a roll-back provision can be requested and provided at the discretion of the competent authority.
Mutual Agreement Procedures (MAP)
In Ireland, Irish Revenue is the competent authority. Taxpayers may request MAP assistance under the terms of the relevant DTT in conjunction with the relevant articles of the Multilateral Instrument (MLI) where applicable], the EU Arbitration Convention, or the EU (Tax Dispute Resolution Mechanisms) Regulations 2019 (EU TDRM).
Interest limitation rules (ILR)
Interest limitation rules apply in relation to the deductibility of interest with the aim of limiting base erosion through the excessive use of interest deductions by linking a taxpayer’s allowable net borrowing/interest costs directly to its level of earnings. The provisions of ILR operate alongside existing rules that restrict the deductibility of interest expenses.
The maximum corporation tax deduction available under these rules for net borrowing/interest costs is limited to 30% of tax-adjusted earnings before tax and before deductions for net interest expense, depreciation, and amortisation (EBITDA), subject to some exceptions. These exceptions include:
- Where the relevant entity’s net borrowing costs are less than EUR 3 million.
- Where a company is a 'standalone' company, being a company that has no associated enterprises or PEs and is not a member of a worldwide group.
- Long-Term Public Infrastructure Projects, being projects to provide, upgrade, operate, or maintain a large-scale asset in the general public interest including large-scale residential projects.
- Interest on legacy debt, being debt the terms of which were agreed to prior to 17 June 2016.
In addition to the above exceptions, an interest deduction greater than 30% of EBITDA may be available for the relevant entity (i.e. the group ratio). This is on the basis that the relevant entity is part of a consolidated worldwide group for accounting purposes and the worldwide group’s net borrowing costs as a proportion of EBITDA are greater than 30%. The relevant entity can then use this higher proportion in its own calculations.
The second exception available is the equity ratio carve out. For the equity ratio to apply, the relevant entity’s equity ratio must be no lower than two percentage points below the worldwide group or single company worldwide groups’ equity ratio, as applicable, based on the financial statements for the period in which the relevant entity’s accounting period ends. If this carve out applies, the ILR does not apply and the relevant entity can get a full deduction for interest.
Ireland applies the rules using a 'group approach', that is, calculating the interest restriction at the level of a local group of companies ('interest group'). The legislation provides that the 'interest group' will encompass all companies within the charge to corporation tax in Ireland that are members of a financial consolidation group as well as any non-consolidated companies that are members of a tax loss group for Irish corporation tax purposes, and those companies have elected to join the interest group. The reporting company must make a return on behalf of the interest group on or before the specified return date in the form specified by the Revenue Commissioners.
If interest payments are restricted under the ILR in an accounting period, then the excess can be carried forward indefinitely and deducted as a 'deemed borrowing cost' against taxable income, subject to capacity in future periods. If, in an accounting period, there is spare capacity, it can be carried forward for a period of up to 60 months from the end of the accounting period in which it arose.
Country-by-Country (CbC) reporting
CbC reporting is applicable for Irish-parented multinational enterprises (Irish MNEs). Irish MNEs with consolidated annualised group revenue of EUR 750 million or more are required to comply with the requirements. Irish MNEs must file a CbC report annually to include specific financial data covering income, taxes, and other key measures of economic activity for each territory in which they operate.
In certain circumstances, Irish subsidiaries of foreign headquartered MNEs may also be required to file an ‘equivalent’ CbC report in Ireland.
Irish members of an MNE subject to the CbC reporting obligation are required to notify Irish Revenue of the name and jurisdiction of tax residence of the reporting entity as well as of its reporting status (ultimate parent entity, surrogate parent entity, EU designated entity, or a domestic constituent entity) by the last day of the fiscal year.
Public Country-by-Country (CbC) reporting
EU Directive 2021/2101/EU was transposed into Irish law by way of a statutory instrument effective from 22 June 2023. This requires public disclosure of certain financial and non-financial information by certain undertakings and branches (i.e. public country-by-country reporting or pCbCR). The rules apply to both EU based and non-EU based multinational enterprises doing business in the EU through a branch or a subsidiary with global turnover exceeding €750m in each of the last two consecutive financial years.
For multinational enterprises whose pCbCR obligation is governed by the Irish regulations, the reporting obligation applies from the first financial year starting on or after 22 June 2024 and the report must be filed within 56 days of the company’s Annual Return Date, which is specific to each company.
Controlled foreign companies (CFCs)
With effect for accounting periods beginning on or after 1 January 2019, CFC rules apply that give effect to measures contained in the EU’s ATAD. Subject to certain exemptions, the CFC rules tax an Irish group entity on the amount of undistributed profits of a CFC that can reasonably be attributable to certain activities that are carried on in Ireland.
A ‘CFC’ is defined as a non-Irish resident company that is controlled by a company or companies that are tax resident in Ireland.
A CFC charge exists where a CFC has undistributed income that can be reasonably attributed to ‘relevant Irish activities’. The term ‘relevant Irish activities’ is broadly defined as being significant people functions (SPFs) or key entrepreneurial risk-taking (KERT) functions performed in Ireland on behalf of the CFC. These functions must relate to the CFC’s legal and beneficial ownership of the assets or the assumption and management of the risks. The meanings of SPFs and the KERT functions are aligned with the 2010 OECD Report on Profit Attribution to Permanent Establishments.
Where a CFC charge exists, the chargeable company is the company in which these ‘relevant Irish activities’ are performed, and the tax rate is dependent on the nature of the income arising. Any foreign tax paid or borne by CFC may be allowed as a credit against Irish tax arising on the CFC charge.
There are several exemptions to the CFC charge, which can be broadly categorised into two main groups:
- Exemptions that exclude a CFC fully from the charge. These include an effective tax rate exemption, profit/profit margin exemptions, an essential purpose test exemption, and an exemption where the CFC has no non-genuine arrangements in place.
- Exemptions that apply to specific income streams of a CFC. These include a transfer pricing exemption and an essential purpose test exemption.
In addition, an exempt period may also apply on the acquisition of a CFC where certain conditions are satisfied.
A CFC that is tax resident in a jurisdiction listed in Annex I of the EU list of non-cooperative jurisdictions for tax purposes will have a number of the exemptions disapplied to it. The disapplied exemptions are the effective tax rate exemption, the low profit margin exemption, and the low accounting profit exemption.
For an accounting period beginning in the calendar year 2023, the relevant EU list of non-cooperative jurisdictions is the October 2022 list.
EU mandatory disclosure rules (DAC6)
The EU Directive on the mandatory disclosure of certain cross-border arrangements (known as DAC6) is now part of the Irish Tax Code. The Mandatory Disclosure of Certain Transactions legislation imposes a mandatory reporting obligation for ‘intermediaries’ (or the relevant taxpayer in certain circumstances) of certain cross-border tax arrangements to Irish Revenue.
Where a cross-border arrangement meets certain hallmarks, it must be reported to the national tax authorities within a specified time limit. The hallmarks are seen as characteristics or features that indicate a potential risk of tax avoidance. The information on reportable cross-border arrangements is shared automatically between the member states every three months through a centralised database.
The primary reporting obligation rests with EU-based ‘intermediaries’. However, in certain specified circumstances, the reporting obligation rests instead with the taxpayer. The Directive came into force on 25 June 2018, and it applies from 1 July 2020. The filing deadline for reportable arrangements is 30 days after the reporting obligation is triggered, which is generally the earlier of the date on which the arrangement is made available for implementation, is ready for implementation, or the first implementation step is taken.
Mandatory exchange of information for digital platform operators (DAC7)
Ireland applies the EU tax transparency rules for digital platform operators (DAC7). Automatic reporting obligations apply to digital platform operators with an EU nexus and to non-EU operators that facilitate the use of a platform by EU resident sellers or the rental of immovable property located in the European Union by any user. The rules aim to provide EU member states’ tax authorities with information to monitor compliance with tax rules for commercial activities performed on digital platforms and identify situations where tax should be paid. The reporting requirements are standardised across the European Union, and the legislation seeks to reduce the administrative burden on operators by requiring platforms to report in only one EU member state where they have operations in multiple jurisdictions. The rules took effect on 1 January 2023, with the first reporting due on or before 31 January 2024.