Brexit: Potential Direct Tax implications

Although Brexit and how it will ultimately be achieved has given rise to significant levels of uncertainty for Irish businesses trading with and in the UK, it should have minimal impact from an Irish Direct tax perspective for Irish resident companies and Irish branches of overseas companies.

Impact for Irish resident companies and Irish branches of overseas companies

An Irish company that forms part of an international group or that has sister subsidiaries or a parent company overseas avails of a range of tax reliefs and exemptions on making cross border payments of dividends, interest and royalties.

How a group is structured and where companies in that group are resident for tax purposes also has a bearing on looking at reliefs that apply on transferring assets between companies and on considering whether the participation exemption applies on a sale by an Irish holding company of shares in certain subsidiary companies.

The reliefs and exemptions that apply are available under EU Directives, Double Tax Agreements (DTAs) and Irish domestic legislation provisions. Post-Brexit, the UK will not form part of the EU and we have assumed for this article that it will likewise not form part of the EEA. Although those reliefs and exemptions that are provided for in the EU Directives are directly relevant only for companies resident in an EU or EEA jurisdiction and so will no longer apply where the UK is the opposite jurisdiction, for the most part there should be alternative reliefs or exemptions that apply to companies resident in Tax Treaty jurisdictions. While the mechanism by which relief or exemption is granted may change post-Brexit, the level of tax leakage arising because of Brexit from a direct tax perspective in terms of the imposition of withholding taxes and tax liabilities arising through asset transfers or through the operation of corporation tax loss relief being subject to change in real terms should not be significant.

The reliefs covered by EU directives relate mainly to:

  • Exemption from Dividend withholding taxes under the Parent Subsidiary Directive (s831 TCA 1997);
  • Exemptions from withholding taxes on Interest and Royalties under the Interest & Royalties directive (s267G – s267L TCA 1997); and
  • Deferral of CGT under the Mergers Directive (s630 – s638 TCA 1997)

The advantage of relying on an EU Directive is that no clearance is required in advance of making a payment or entering into a particular transaction. Seeking relief under a DTA, on the other hand, will often necessitate obtaining a certificate of residence from the relevant tax authorities.

Payment of dividends

In the case of Irish dividend withholding tax, relying on the EU Parent-Subsidiary Directive (“EU PS”) (s831 TCA 1997) in principle avoids the need to obtain a self-declaration from the recipient of the dividend whereby an authorised signatory of the recipient company certifies that it is resident in an EU Member State or Tax Treaty jurisdiction. Where this is the case then the Irish resident dividend paying company is authorised to pay a dividend gross provided that it files a dividend withholding tax declaration and dividend withholding tax return with the Irish Revenue Commissioners within 14 days of the end of the month in which the dividend is paid.

Dividend Withholding Taxes – post-Brexit

An Irish resident subsidiary company paying dividends to a UK resident parent can continue to pay the dividend gross without any requirement to operate Irish withholding taxes following Brexit. The self-declaration process outlined above is required to be complied with. Once the self-declaration is in place, it remains valid, allowing dividends to be paid gross, from the date of issue to 31 December of that year and for five years from 31 December of that year. It remains a requirement to advise Irish Revenue of the dividend payment through filing a dividend withholding tax return within 14 days following the end of the month in which the dividend was paid.

Interest and Royalties – post-Brexit

Although the interest and royalties Directive will no longer apply to an Irish company paying interest and royalties to UK based recipients post-Brexit, there are alternative provisions in the Irish tax legislation which mean that interest can be paid from an Irish company to a UK resident company without the imposition of withholding taxes.

Interest – disapplication of withholding taxes

  1. Interest can be paid by an Irish resident company in the ordinary course of a trade or business carried on by it to a company resident for tax purposes in a treaty country that taxes income from foreign sources. This exemption is disapplied where the interest is paid in connection with a trade or business which is carried on in Ireland by that company through a branch or agency;
  2. A separate exemption from interest withholding tax is provided by the operation of the double tax treaty only, in s246(4)(h)(II) TCA 1997. Where this exemption is availed of, it is necessary to complete a form IC6 (Company) and to return it to the International Claims Section in Nengah. It is essential in completing the form to confirm that an arms’ length rate applies to the interest payments. The treaty exemption is confined, as confirmed in the Interest Article of the treaties, to the recipient who is the beneficial owner of the interest and to the interest that is an arms’ length amount that would be paid between independent persons acting at arms’ length.
  3. In addition to the Interest and Royalties Directive, there is an additional provision contained in the Irish direct tax legislation that is aimed solely at companies resident in a relevant Member State. Where yearly interest is paid within the group payments provisions set out in s410 TCA 1997, the withholding tax provisions in s238 and s246 TCA 1997 do not apply to the payment so that they can be made gross. The group payment provisions apply where a company resident in a relevant Member State makes a payment to another company resident in a relevant Member State and either:
  • the company making the payment is:
  • a 51% subsidiary of the other company or of a company resident in a relevant Member State of which the other company is a 51% subsidiary, or
  • a trading or holding company owned by a consortium the members of which include the company receiving the payment, or
  • the company receiving the payment is a 51% subsidiary of the company making the payment.

A relevant Member State for this purpose means an EU Member State or an EEA State with which Ireland has a double taxation agreement in place.

Royalties – disapplication of withholding taxes

S237 and s238 TCA 1997 impose an obligation to withhold income tax at the standard rate from certain payments including patent royalties paid by the user of a patent. There is no requirement contained in Irish domestic legislation to withhold tax from royalties or other payments made in respect of copyrights, rights or access to formulae, secret process or technical know-how.

Under tax treaties, the term “royalty” is wider than under our domestic legislation, as it encompasses “payments of any kind… for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience”. It is possible therefore for withholding taxes to apply on payments to Irish companies that are in respect of royalties within the meaning of the treaty but not relating to patent royalties.

S242A TCA 1997 provides that withholding tax will not apply to the payment of patent royalties paid by a company in the course of a trade or business to a company resident in a tax treaty country, provided that the jurisdiction in which the recipient company is resident imposes a tax that generally applies to royalties receivable from sources outside that country.

The Revenue Statement of Practice SP – CT 01/10 Treatment of Certain Patent Royalties paid to Companies Resident Outside the State applies to exempt from the withholding tax provisions imposed by s238(2) TCA 1997 payments to corporate recipients resident in any jurisdiction, including non-treaty, where the following conditions are met:

  • the payment is made in respect of a foreign patent in relation to an invention developed outside Ireland and under a licence agreement executed in a foreign territory and subject to the law and jurisdiction of a foreign territory;
  • the foreign corporate recipient must be the beneficial owner of the royalty payment and must not be carrying on a trade in Ireland through a branch or agency;
  • the Irish resident paying company must make the payment in the course of its trade; and
  • the payment is not part of a back to back or conduit arrangement whereby the payment represents all or substantially all of the income received or receivable by the paying company in connection with licensing of the same foreign patent.

The facility whereby Irish Revenue allows an Irish resident company to pay a patent royalty without the operation of withholding tax, where neither s242A TCA 1997 nor the Interest and Royalties Directive apply, is referred to as an administrative practice. Specific documentation is required to be retained by the paying company and there is a requirement for the paying company to notify Revenue by the due date for filings its corporation tax return for the accounting period in which the royalty is paid. In addition to this relief being available when making royalty payments to a non-treaty jurisdiction, it can also be utilised for treaty and EU jurisdictions where all the conditions outlined in the relevant legislative provisions are not met. Where royalties are payable, for example, to a treaty jurisdiction that operates a territorial system of taxation then s242A TCA 1997 could not be availed of and the administrative practice could be utilised instead.

CGT – post-Brexit

As a result of changes introduced to capital gains tax group relief provisions in Finance Act 2017 that have effect from 1 January 2018, Brexit should not impact on the ability of Irish resident companies to transfer assets between them or to transfer assets between themselves and Irish branches of treaty resident companies. For assets that might have transferred before that date, Brexit should not have an impact from a practical perspective as the Finance Act 2017 amendment simply put what had been Revenue practice in extending capital gains tax group relief provisions from EU and EEA jurisdictions to other tax treaty jurisdictions into the legislation.

Cross border mergers post-Brexit

Cross-border mergers involving UK-registered companies will no longer be permitted under the Cross-Border Merger Directive because for it to apply at least two of the merging entities must be governed by the laws of different EEA Member States. For s80 SDCA 1999 relief from Stamp Duty to apply where a company issues shares to shareholders as part of a business reconstruction it is necessary that the acquiring company is incorporated in another Member State of the EU or in an EEA State.

Corporation tax loss relief - post-Brexit

There are aspects of corporation tax loss relief that are specific to Irish branches of EU resident companies only, such as the relief provided by s411(2A) TCA 1997. This provision allows for an Irish branch of a company that is resident in a “relevant Member State”, that is, either an EU Member State or an EEA State with which Ireland has entered into a tax treaty, to surrender current year losses which are otherwise trapped to an Irish resident company that holds at least 75% of the shares in the loss surrendering company. It is also the case that Irish branches of companies resident in a relevant Member State can surrender losses to and claim losses from both Irish resident companies and other Irish branches of companies resident in a relevant Member State.  

Post-Brexit, an Irish branch of a UK resident company, will, in the absence of specific provisions being introduced into the Irish direct tax legislation, be unable to surrender or claim trading losses to or from Irish resident companies or Irish branches of a relevant Member State. Under the existing Irish tax legislation, an Irish branch of a UK resident company will be unable to surrender current year losses which are otherwise trapped to an Irish resident 75% parent.

Exit Tax

S627 TCA 1997 imposes an exit tax charge in the following situations:

  • where a company transfers its assets from its permanent establishment in Ireland to its head office or permanent establishment in another territory;
  • where a company transfers the business carried on by its permanent establishment in Ireland to another territory; or
  • where an Irish-resident company transfers its residence to another country.

It does this by deeming a disposal and reacquisition of the relevant assets to have occurred. This results in a charge to tax in respect of any chargeable gains which may have accrued in respect of the assets such that they are no longer within the charge to tax. The charge is based on the market value of the assets at the time of the deemed disposal. If the assets of a migrating company continue to be used in Ireland by a permanent establishment of the company after it migrated, exit tax does not apply.

S629 provides for the deferral of such tax by allowing it to be paid in instalments over five years.

The deferral option will not be available in respect of assets which have been transferred to a non-EU country unless that country is an EEA resident country and has concluded a double tax treaty with Ireland.

Operation of the relief from Irish capital gains tax for certain disposals of land or buildings

Where land or buildings situated in any EEA State was acquired between 7 December 2011 and 31 December 2014 relief from capital gains tax on subsequent disposal of the land is obtained where the land is disposed of between 4 and 7 years from the date of acquisition and any gain arising in these circumstances is not a chargeable gain. In the absence of an amendment to this provision, this CGT relief would not seem to apply to UK land and buildings disposed of post-Brexit.

CAT agricultural property relief (s89 CATCA 2003)

CAT agricultural relief is available for agricultural land, pasture and woodland situated in an EU Member State. Post-Brexit, in the absence of an amendment to the legislation, agricultural relief will no longer be available for UK-situated land. Furthermore, and again in the absence of an amendment to the legislation, UK situated agricultural land will not count for meeting the farmer test.

 

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below:

Staff Member

Position

Email

Telephone

Frank Greene

Tax Partner

fgreene@mazars.ie

01 449 6415

Pádraig Daly

Tax Director

pdaly@mazars.ie

01 449 4469

Nóirín Cahalane

Tax Director

ncahalane@mazars.ie

01 449 4414

September 2019

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