The concept of ‘fiscal unity’ or consolidated group tax does not exist in Ireland. However, trading losses as 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.
Transfer pricing rules have been in place in Ireland since 2011. The legislation endorses the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and adopts the arm’s-length principle. The regime applies to domestic as well as international related-party arrangements.
The transfer pricing regulations only apply to related-party dealings entered into by a taxpayer engaged in a trade that is within the charge to tax under Case I or Case II of Schedule D (typically income and profits subject to tax at the 12.5% standard rate). However, we expect Irish transfer pricing rules to be extended to non-trading and capital transactions with effect from 1 January 2020.
Therefore, income that is characterised as 'passive income' subject to tax at a rate of 25% falls outside the scope of the transfer pricing legislation. Passive income for the purposes of these rules may include interest, royalties, dividends, and rents from property where the income arising is not derived from an active trade. For example, interest income arising to a bank will clearly constitute income from an active trade. Consequently, any interest arising to a bank from a related-party arrangement will fall within the scope of the transfer pricing rules.
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.
The legislation also places an obligation on a taxpayer to provide documentation ‘as may reasonably be required’ to support the arm’s-length nature of the related-party arrangements and that documentation will need to be prepared 'on a timely basis'. Guidance notes issued by the Irish tax authorities on transfer pricing documentation support the legislative basis and indicate that a company is required to have transfer pricing documentation available for inspection if requested by the Irish tax authorities. Notably, the guidance notes state that ‘it is best practice that the documentation is prepared at the time the terms of the transaction are agreed’. Additionally, the guidance notes state that in order ‘for a company to be in a position to make a correct and complete tax return, appropriate transfer pricing documentation should exist at the time the tax return is filed’. It is worth noting that the taxpayer can maintain documentation in the form 'of its choosing'. Additionally, where documentation exists in another territory that supports the Irish arrangement, this will also be sufficient from an Irish transfer pricing perspective, provided that the documentation is in English. The Irish tax authorities have also confirmed that they will accept documentation that has been prepared in accordance with either the OECD Transfer Pricing Guidelines or the code of conduct adopted by the EU Council under the title 'EU Transfer Pricing Documentation'.
Note that arrangements entered into between related parties prior to 1 July 2010 are ‘grandfathered’ and thereby excluded from the scope of the transfer pricing rules. There is also an exemption from the rules for small and medium-sized enterprises. Broadly speaking, small and medium-sized enterprises include enterprises employing less than 250 people and that have either a turnover of less than EUR 50 million or assets of less than EUR 43 million.
In 2015, a dedicated transfer pricing audit team was formed within Irish Revenue. This team has begun to initiate specific transfer pricing audits and aspect queries to monitor compliance with Irish transfer pricing rules.
In 2018, Irish Revenue issued guidance to taxpayers on a simplified approach to low-value, intra-group services. The guidance covers services that are of an administrative, routine, or supportive nature, can be considered ancillary to the business of the multinational enterprise (MNE), do not use or create unique and valuable intangible assets, and do not involve significant risk for the service provider. In their guidance, Irish Revenue confirmed that they are prepared to accept a cost based return with a mark-up of 5% being applied thereto. There would be no need for a benchmarking study to be carried out by the taxpayer to support this rate.
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 invoked in certain cases.
Mutual Agreement Procedures (MAP)
In Ireland, Irish Revenue is the Competent Authority. Taxpayers may request MAP assistance under the terms of the relevant double taxation agreement and/or the EU Arbitration Convention.
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.
Controlled foreign companies (CFCs)
Finance Act 2018 introduced CFC rules, which give effect to measures contained in the EU’s ATAD. The new rules are effective for accounting periods beginning on or after 1 January 2019. 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 meaning of SPFs and the KERT functions is 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.