On September 7, 2018, Ireland’s Department of Finance (“Finance”) issued a controlled foreign company (CFC) impact statement related to the implementation of EU Anti-Tax Avoidance Directive (“ATAD 1”) (2016/1164) by January 1, 2019. See BEPS Action 3. ATAD 1 applies to all taxpayers that are subject to corporate tax in at least one member state, including permanent establishments (PEs) in at least one member state of entities that are tax resident in a third country.
In general, CFC rules reattribute the income of a low-taxed controlled subsidiary to its parent company. Then, the parent company becomes taxable on this attributed income in the State where it is a tax resident. “In order to ensure that CFC rules are a proportionate response to BEPS concerns, it is critical that Member States that limit their CFC rules to income which has been artificially diverted to the subsidiary precisely target situations where most of the decision-making functions which generated diverted income at the level of the controlled subsidiary are carried out in the Member State of the taxpayer.”
Finance held a public consultation, on the implementation of ATAD 1, from October 10, 2017 to January 30, 2018. The consultation paper included a question on considerations relevant to the transposition of CFC rules and the majority of the 22 submissions received. Finance is publishing this paper to respond to the views from the public consultation and to provide potential approaches to the CFC rules. Finance is currently considering potential issues to the future CFC rules. Comments on this impact statement are invited until September 28, 2018.
Ireland plans to introduce CFC rules by implementing the ATAD 1 approach, which attributes 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 functions (SPFs) relevant to those assets or risks are carried out and are instrumental in generating the CFC’s income.
According to ATAD 1, member states may exclude from the above CFC rule an entity or PE: (1) that has accounting profits of €750,000 or less, and non-trading income of €75,000 or less, or (2) the accounting profits amount to 10% or less of its operating costs for the tax period.
In the event that taxpayers seek to circumvent the CFC rules through a holding company in between the parent and the CFC, and the CFC pays a dividend to the holding company, Finance is considering 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 as reduced by 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.
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