In June 2016 the EU adopted the Anti-Tax Avoidance Directive (ATAD). The Directive contains five legally-binding anti-abuse measures, which all EU Member States are required to implement against common forms of aggressive tax planning. In Finance Act 2018 the Government introduced legislation in respect of two areas set out below:
i. Controlled Foreign Company (CFC) Rules
CFC rules are an anti-abuse measure to prevent diversion of profits to low/no tax jurisdictions. Such provisions are already a common feature of the tax systems of other tax jurisdictions, including many EU territories. Therefore by adopting these provisions Ireland is not moving unilaterally but is really playing catch up with other jurisdictions.
The legislation targets Irish companies that control foreign companies in low/no tax jurisdictions. The objective of the legislation is to change behavior, as opposed to being revenue generating. Where the CFC rules apply then the undistributed income of the CFC is attributed to the parent company (or associated company of the parent) and taxed at Irish corporation tax rates, being 12.5% where the profits of the CFC have been generated through trading and 25% otherwise.
The legislation includes a number of exemptions from the CFC provisions. In particular the provisions only apply where the profits of the foreign controlled company are taxed at a rate that is less than 50% of the rate that would apply if the profits were earned by the Irish company. As the Irish rate of corporate tax on trading income is one of the lowest internationally, the provisions will really be of most concern where the foreign controlled entities are located in no tax/haven jurisdictions.
ii. Exit charge on company migration
An exit charge is a charge that arises where a company “migrates” its tax residence from one jurisdiction to another jurisdiction. Where the charge arises, the company migrating its tax residence is deemed to make a disposal of all of its chargeable assets and to reacquire them at market value. The gain arising is then subject to tax.
Whilst Ireland has had an exit charge for many years, due to a number of exceptions within the legislation, it was relatively easy to migrate residence without triggering a tax charge. Following on from the ATAD, the legislation that was in place before Finance Act 2018 has now been replaced in full, with the effect that the exceptions that previously applied are no longer available.
The legislation targets assets leaving the Irish tax net by virtue of the migration i.e. generally no exit charge arises in respect of specified assets such as Irish land, which continue to remain within the charge to Irish tax. Where the charge arises the deemed gain is subject to tax at a rate of 12.5%, whereas under the previous Irish legislation a tax rate of 33% applied. There is however, specific anti-avoidance legislation that reinstates the 33% where the migration forms part of a “transaction” to dispose of the asset and the purpose of the migration is to avail of the lower 12.5% rate as opposed to the 33% rate that would apply on a straight disposal. Where the corporate residence is migrated to another EU/EEA jurisdiction it is possible to opt to defer payment of the tax over 6 equal instalments at yearly intervals.
On the flipside, the legislation provides that where an asset is transferred into Ireland and an exit tax arises in another EU State (i.e. a migration of corporate tax residence into Ireland), then the valuation of the asset used for the purpose of exit tax imposed by that other EU State shall be taken to be the acquisition cost of that asset for the purpose of Irish capital gains tax (provided that value reflects the asset’s market value).
The legislation is effective from 10 October 2018 (the date of Budget 2018).
Revenue or capital gain –Recent developments
Revenue grabbed headlines towards the end of 2018 by issuing a notice of assessment on Perrigo, a large pharmaceutical company, demanding c. €1.6 billion in corporation tax. This is understood to be the second largest assessment issued in Irish history, after the assessment issued to Apple at the behest of the European Commission. The tax payment demand revolves around the sale of intellectual property for the Multiple Sclerosis drug Tysabri by Elan in 2013. Elan was acquired bought by Perrigo in late 2013.
Elan had treated the revenue from the sale of the drug as trading income and thus liable to tax at 12.5% on the basis that it formed part of its trade. As Elan at the time had trade losses carried forward from prior years it used these to offset the profit on disposal and so didn’t pay any tax. However, Revenue took the view that the sale should not have been treated as a trading in nature and instead should have been treated as a capital disposal and liable to tax at 33% rate. Perrigo have appealed the decision and so it will now go to the Tax Appeals Commission to consider and adjudicate.
It is worth pointing out that the Government is actively marketing Ireland is an attractive jurisdiction globally for the location and exploitation of intellectual property. The outcome of this case could therefore have quite far reaching implications for Ireland’s attractiveness as a location for holding and exploiting IP. We will keep you updated as to how the case develops.
Return to Tax Issue - Spring 2019
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