On December 19, 2018, Ireland’s President signed Finance Act 2018 (Act 30 of 2018) into law, which implements the EU Anti-Tax Avoidance Directive (ATAD 1) (2016/1164) controlled foreign company (CFC) rules in a new Part 35B of the Taxes Consolidation Act 1997 (TCA), with effect from January 1, 2019.
Editor’s Note: Finance Act 2018 also implements the ATAD 1 exit tax rules that applies to transactions on or after October 10, 2018, which are not discussed below.
Editor’s Note: On September 7, 2018, Ireland’s Department of Finance issued a CFC impact statement related to the implementation of the ATAD 1. Finance held a public consultation, on the implementation of ATAD 1, from October 10, 2017 to January 30, 2018.
An entity will be considered a CFC where it is subject to more than 25% control by a parent company and its associated enterprises, and the tax paid on its profits is less than the difference between the corporate tax that would have been charged in the taxpayer’s member state and the actual corporate tax paid.
Ireland’s CFC rules attribute to the parent company undistributed income of the CFC that arises from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage. An arrangement is non-genuine to the extent that the CFC would not have owned the assets or undertaken the risks that generated the income if it were not controlled by a company where the significant people (SPFs) or key entrepreneurial risk-taking (KERT) functions relevant to those assets or risks are carried out and are instrumental in generating the CFC’s income. The relevant functions must relate to the CFC’s legal and beneficial ownership of the assets, or the assumption and management of the risks.
Taxpayers (i.e., entities and PEs) are excluded from the Irish CFC rules under Section 835V of the TCA, when they have (1) accounting profits of €750,000 or less, and non-trading income of €75,000 or less, or their (2) accounting profits are less than €75,000 for the tax period. The Irish CFC rules include the following additional exemptions, among others:
- Transfer pricing exemption:To the extent the CFC has undistributed income arising from arrangements that are subject to Irish transfer pricing rules, or it is reasonable to conclude that such arrangements should be entered into by persons dealing at arm’s-length, no Irish CFC charge should apply to that income.
- Essential purpose test:To the extent the CFC has undistributed income arising from arrangements and the essential purpose of those arrangements is not to secure a tax advantage, then no Irish CFC charge should apply to that income.
In the event that taxpayers seek to circumvent the Irish CFC rules through a holding company in between the parent and the CFC, and the CFC pays a dividend to the holding company, Section 835Q of the TCA contains the following definition regarding undistributed income:
“… the undistributed income of a controlled foreign company for an accounting period shall be its distributable profits for the accounting period, less any relevant distributions made in respect of the accounting period…. the distributable profits of a controlled foreign company for an accounting period shall be the amount included in the accounting profits of the company which, notwithstanding any prohibition under the laws of the controlled foreign company’s territory of residence or otherwise, are available for distribution to members of the company and which can reasonably be attributed to relevant Irish activities undertaken by a controlling company or a company connected with the controlling company for that accounting period.”
Section 835N of the TCA provides a credit for any foreign tax paid on the underlying CFC income, to ensure that the income is not double taxed.
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