After two years we are starting to come to terms with the impact of Brexit from a tax perspective. The most common issue we see is around the VAT implications of the movement of goods, which Ronan McGivern will discuss in our next lunchtime seminar on Monday April 25th.
Another aspect that companies should consider is whether setting up operations in Ireland or registering for VAT creates a permanent establishment (PE) for them with further Irish tax considerations. This area has been very topical over the last number of years, not only because of Brexit, but also because of the circumstances that many companies found themselves in due to Covid with displacement of employees, which resulted in unintentional tax consequences for many companies i.e. employees of foreign companies undertaking their duties from home.
This tax risk was acknowledged by a number of tax authorities during the pandemic with many providing concessions for the impact of displaced employees on creating a PE. Irish Revenue, like the Revenue Authorities of other jurisdictions introduced a form of concession. However, with the easing of restrictions the concession provided by Irish Revenue has been removed. An issue that arises is that work patterns and routines have been established. Companies must now consider whether arrangements made with displaced employees during the pandemic now create a permanent establishment risk for the business.
Permanent establishment is a well-established concept enabling taxing rights of a non-resident company to partially shift to the country in which a PE is created. Ireland generally follows the OECD guidelines when it comes to creating a PE, which state that in order for a PE to be created in Ireland the foreign entity must have:
- a fixed place of business in the State in which the business of the enterprise is wholly or partly carried on or
- an agent acting on behalf of the company has and habitually exercises authority to do business on behalf of the company in Ireland.
The circumstances in which a PE is created is covered in most double taxation agreements (DTA) and therefore it is necessary to look at the DTA of the relevant jurisdiction to determine whether a PE has been created.
Below are some common scenarios we are seeing as UK companies set up in Ireland to create an EU footing or to simplify their logistic routes for supplying goods within the EU.
- Holding stock in Ireland – see below
- Employees working from their homes in Ireland – an employee’s home is generally not a fixed place of business for a company (provided it is not at the disposal of the employer), however a PE could be created if the employee is an agent acting on behalf of the company as outlined at (2) above
- Renting an office place for an employee to permanently work from in Ireland – this would create a PE as this is a fixed place of business
- An employee based permanently in a customer’s premises in Ireland – this may create a PE and advice should be sought to consider the individual facts
It is important to consider each individual case based on the circumstances. However, there are a number of specific activities in the DTA between the UK and Ireland that are specifically not treated as creating a PE, even if they are carried on through a fixed place of business. The specific exceptions are:
- The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage display or delivery;
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
- The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information, for the enterprise;
- The maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise.
- A building site or installation project constitutes a permanent establishment only if it lasts more than 6 months.
Notwithstanding that a company may not have a fixed place of business at its disposal in Ireland, it is still possible for a PE to exist by virtue of a dependent agent being based in Ireland who has authority to bind the company and habitually exercises that authority in Ireland as referenced above. As can be appreciated by the above, whilst maintaining a stock of goods in Ireland on its own will give rise to a requirement to register for Irish VAT, it does not per se create an Irish PE, which means no corporate tax filing obligation.
This agency PE most commonly arises in the context of “sales managers/employees”. These employees tend to be responsible for a particular jurisdiction and have the authority to enter into sales contracts with customers binding the Head Office.
It is critically important that when business cross borders to undertake operations in another jurisdiction that they fully consider all potential tax implications. In some instances depending on the operations and the level of activities in Ireland an Irish PE can arise. Having an Irish PE/branch is not necessarily a negative, given the fact that the rate of Irish corporation tax on trading profits is currently 12.5%. Provided a tax credit is available in the home jurisdiction it generally leads to no additional tax. In some instances where a foreign branch exemption is available it can actually lead to a reduction in effective corporate tax rate.
Talk to RBK Taxation about how we can assist your business.
- Sinead McMahon, Tax Director, (01) 6440100
- Ronan McGivern, Tax Partner, (01) 6440100