Corporation Tax (CT): Introduction; Residence of Companies; Double Taxation Relief; CbC Reporting and Transfer Pricing

Question 1

What is the purpose of Ireland’s Double Taxation Agreements with other countries?

Answer 1

Ireland’s DTAs with 76 countries (74 in effect) aim to prevent the double taxation of income that has been taxed in one treaty country from being taxed again in another.

These agreements typically allow for a tax credit or an exemption from tax on certain types of income, either in the country of residence or the country where the income was earned.

Question 2

Under what conditions can companies resident in an EU member state or a DTA country be considered part of a group for corporate tax purposes in Ireland?

Answer 2

Companies resident in an EU member state or a country with which Ireland has a Double Taxation Agreement (DTA) can influence whether a group relationship exists. However, to be considered part of the group for Irish tax purposes, such companies must have a branch in Ireland.

Question 3

In what circumstances do the Country-by-Country (CbC) reporting requirements apply?

Answer 3

CbC reporting applies to multinational enterprise (MNE) groups with total consolidated group revenue of €750 million or more in the preceding fiscal year.

Question 4

Who is required to file a Country-by-Country report in Ireland? (3 entities)

Answer 4

In Ireland, the following entities of an MNE Group are required to file CbC Reports if they are Irish tax residents:

1. An ultimate parent entity of an MNE Group (usually based in the country where the group’s global headquarters are located)
2. A surrogate parent entity of an MNE Group, under specific circumstances.
3. An EU-designated entity of an MNE Group, under specific circumstances.

Question 5

What information must be included in the CbC report? (7 + 3)

Answer 5

The report must include details such as revenue, profit before tax (PBT), income tax paid and accrued, number of employees, capital, retained earnings, and tangible assets for each country/jurisdiction where the group operates.

It must also include the tax identification numbers of all entities, each company’s tax residence, and an indication of the business activities engaged in by each entity.

Question 6

When is the CbC report filing deadline?

Answer 6

The CbC report is generally due within 12 months of the end of the fiscal year of the MNE group.

Question 7

What are the penalties for failing to comply with Country-by-Country filing (CbC) requirements?

Answer 7

If a return is not made, or if an incorrect or incomplete return is submitted, Revenue may impose a penalty of €19,045. Additionally, a further penalty of €2,535 applies for each day the failure continues after the initial penalty is imposed.

Question 8

What is the purpose of Country-by-Country reporting?

Answer 8

These provisions are designed to assist tax authorities in assessing international tax avoidance risks and ensuring that profits are taxed where economic activities are performed and value is created.

Question 9

What is transfer pricing and why is it important?

Answer 9

Transfer pricing rules are a set of regulations and guidelines that govern the pricing of transactions between related entities within a MNE i.e. between enterprises under common ownership or control.

It’s crucial for ensuring that transactions reflect fair market value as if the transactions occurred between unrelated parties, thus preventing profit shifting and ensuring tax compliance in different jurisdictions

Question 10

What is the arm’s length principle in transfer pricing?

Answer 10

The arm’s length principle requires that the terms and conditions of transactions between associated entities within a MNE reflect those that would have been set between independent parties under similar circumstances.

Question 11

What are the common methods used to determine transfer prices? (5 methods)

Answer 11

1. Comparable Uncontrolled Price (CUP) Method
2. Resale Price Method
3. Cost Plus Method
4. Transactional Net Margin Method (TNMM)
5. Profit Split Method

Question 12

Re-cap CAP1: Corporation Tax for Irish Resident Companies (4 points)

Answer 12

1. Irish resident company liable to CT on worldwide profits
2. Profits = Income + Chargeable Gain (CG) (from the disposal of assets)
3. Chargeable gain calculated using CGT rules and adjusted for CT computation: CG x (33/12.5)
4. Companies liable to CGT (not CT) on ‘development land’

Question 13

How are accounting periods (AP) used for Corporation Tax purposes?

Answer 13

AP cannot exceed 12 months.

Example: For a 15-month accounting period ending 31 Dec:
- Split into 12 months followed by 3 months.
- First period: y/e 30 Sept.
- Second period: 3 months to 31 Dec.

Question 14

How are capital allowances and FII treated for Corporation Tax purposes?

Answer 14

Capital allowances for Case I/II are deducted in arriving at the adjusted profit.

Foreign Investment Income (FII): Dividends/distributions from Irish resident companies are exempt from CT (excluding REIT’s).

When calculating the taxable profits for Case I/II, businesses are allowed to deduct capital allowances from their gross profit. This means:

•	Calculating Gross Profit: Start with the revenue earned from the trade or profession and subtract the cost of goods sold and other direct expenses.
•	Adjusting for Capital Allowances: From this figure (the gross profit), deduct the capital allowances. Capital allowances reduce the taxable profit by accounting for the wear and tear of assets used in the business.
•	Arriving at Adjusted Profit: After deducting capital allowances, the resulting figure is the adjusted profit, which is lower than the gross profit because it accounts for the depreciation of assets.

Question 15

What are the Corporation Tax (CT) liabilities for non-resident companies in Ireland? (3 liabilities)

Answer 15

1. Income attributable to any trade carried on in the State through a branch or agency
2. Chargeable gains on disposal of specified Irish assets used for the purposes of the trade or attributable to the branch or agency
3. Irish rental income (Case V) and CG on disposal of its Irish rental properties

Question 16

What are the Income Tax (IT) liabilities for non-resident companies in Ireland?

Answer 16

Income arising in the State not attributable to branch or agency or not assessed CT Case V

Question 17

What are the Capital Gains Tax (CGT) liabilities for non-resident companies in Ireland? (2)

Answer 17

1. Gains on disposals of development land in Ireland
2. Gains on disposals of “specified Irish assets” not assessed to CT

Question 18

Is there a “remittance basis” for non-resident companies in Ireland?

Answer 18

No, there is no “remittance basis” for companies.

(The remittance basis is a method of taxation for individuals who are resident but not domiciled in a country. Under the remittance basis, only the income and gains that are brought into or “remitted” to the country are subject to tax, rather than the individual’s worldwide income and gains.

This allows individuals to keep foreign income and gains outside the scope of local taxation as long as they are not brought into the country.)

Question 19

What are the requirements for non-resident companies in Ireland regarding ‘relevant branch income’?

Answer 19

Companies must compute ‘relevant branch income’ as if the branch were a separate and independent company.

Relevant branch records must be maintained, including a description of any transfer pricing method used.

Question 20

What are the documentation requirements for non-resident companies in Ireland regarding ‘relevant branch income’?

Answer 20

Documentation must be prepared no later than the specified return date and, if requested, sent to Revenue within 30 days.

Documentation is not required for SMEs where relevant branch income for the accounting period is less than €250,000.

Question 21

What is the tax liability of a non-resident company with no branch or agency in Ireland?

Answer 21

A non-resident company with no branch or agency in Ireland can still be liable to Corporation Tax (CT), Income Tax (IT), and/or Capital Gains Tax (CGT).

Question 22

Why is the residence of a company important for tax purposes?

Answer 22

Company residence determines whether and how a company is charged to tax.

Question 23

What are the two tests for determining the residence of a company for tax purposes in Ireland?

Answer 23

1. Management & Control Test: If a company is managed and controlled in the State, it is considered Irish resident.
2. Incorporation Test: Irish incorporated companies are tax resident in Ireland unless they can avail of the Treaty Exemption.

Question 24

What does “managed and controlled” mean for determining the residence of a company in Ireland?

Answer 24

Based on Case Law – factors taken into account (refer to Text 21.3.1)
(Example provided in EG 21.1 using a chart)

Question 25

What is the Treaty Exemption for Irish incorporated companies?

Answer 25

An Irish incorporated company will not be considered Irish resident if it is resident in another country under the terms of the Double Taxation Treaty between Ireland and that country (generally if managed and controlled in that other country).

Question 26

What happens if an Irish incorporated company is managed and controlled in a country without a Double Taxation Treaty (DTT) with Ireland?

Answer 26

The company is Irish incorporated and therefore Irish resident unless it can avail of the Treaty Exemption.

No DTT means no Treaty Exemption.

The company is Irish resident and liable to Corporation Tax (CT) on its worldwide profits.

Question 27

How is an Irish resident company trading abroad through a branch taxed?

Answer 27

1. Company A (Irish resident) pays Irish Corporation Tax (CT) on worldwide profits.
2. Trades in a foreign country through a branch (in the other jurisdiction).
3. Income is subject to Irish CT because Company A is Irish resident and may also be subject to foreign tax in the other jurisdiction on branch profits.
4. This can lead to double taxation, depending on the laws of the other jurisdiction and the tax treaty.

Question 28

What is the fundamental principle for relief from double taxation and what are the types of relief?

Answer 28

Fundamental Principle: Relief MUST be given for all the Foreign Tax paid.

3 Types of Relief:
1. Deduction Relief
2. Credit Relief
3. Exemption Relief

Question 29

What type of relief applies if there is no Double Taxation Treaty (DTT)?

Answer 29

If no Double Taxation Treaty (DTT) exists, Deduction Relief applies.

Question 30

What type of relief applies if a Double Taxation Treaty (DTT) exists?

Answer 30

If a Double Taxation Treaty (DTT) exists, Credit Relief or Exemption Relief will apply.

Question 30

How is deduction relief applied to non-trading income? and what about dividends from trading income?

Answer 30

• Deduction relief applies to non-trading income from a country with no Double Taxation Treaty (DTT).
• Dividends out of trading income from a country with no DTT may qualify for Credit Relief.

Question 31

What are the conditions for Credit Relief under Irish tax law?

Answer 31

Credit Relief is provided under a Double Taxation Treaty (DTT) or because Irish law allows it (unilateral relief). A minimum shareholding of 5% is required for unilateral relief.

The rule means that to qualify for a tax credit on the foreign tax paid on dividends, the taxpayer must own at least 5% of the shares of the foreign company

Question 32

Why is Credit Relief more beneficial compared to deduction, and how does it work with different tax rates?

Answer 32

Credit Relief is more beneficial because it can offset foreign tax paid against Irish tax liability. For example:

•	If the Irish CT rate is 12.5% and the foreign rate is 10%, an additional 2.5% tax is due.
•	If the foreign rate is 15% and the Irish rate is 12.5%, no additional tax is due in Ireland.

Question 33

How does Credit Relief apply to foreign dividends received?

Answer 33

When a foreign dividend is received, it comes out of profits that have already suffered tax (underlying tax). Dividend Withholding Tax (DWT) could also apply to the dividend received, depending on the DTT.

1.	A company in Country A makes a profit and pays corporate tax there.
2.	The company decides to distribute some of these after-tax profits to its shareholders as dividends.
3.	When the company distributes these dividends to a shareholder in Country B, it may withhold Dividend Withholding Tax (DWT) as required by Country A’s laws.
4.	If there is a Double Taxation Treaty (DTT) between Country A and Country B, it may specify a reduced rate of withholding tax or provide conditions under which withholding tax is lowered or exempted.
5.	The shareholder in Country B receives the dividend net of any DWT. They can potentially claim a foreign tax credit in Country B for the tax paid in Country A to avoid double taxation—first, the corporate tax paid by the company on its profits, and second, the withholding tax deducted from the dividend.

Question 34

What is Exemption Relief and how does it commonly apply?

Answer 34

Exemption Relief exempts profits from tax in one country. The most common example is interest, which is taxable only in the country of residence and not in the country of origin.

Question 35

How does Ireland’s tax system make it an attractive location for foreign direct investment?

Unilateral relief is a tax mechanism used by countries to prevent double taxation of income or gains that have been taxed in another country, even in the absence of a double taxation agreement (DTT) between the involved countries. This type of relief is offered unilaterally by a country to ensure that taxpayers do not pay tax twice on the same income.

Answer 35

Ireland provides unilateral relief on foreign dividends from countries where no Double Taxation Treaty (DTT) exists. Only a minimum 5% shareholding is required to avail of unilateral relief.

Question 36

What is the Participation Exemption (PE) and how does it affect foreign dividends received in Ireland?

Answer 36

The Participation Exemption (PE) means that no surcharge is applied on foreign dividends received when the conditions for PE are satisfied. (This is detailed in Chapter 25 and Chapter 26.)

Question 37

What is the filing deadline for Form CT1 in Ireland?

Answer 37

Form CT1 must be filed by the 23rd of the ninth month after the end of the accounting period.

Question 38

What additional filing requirement exists for Irish resident parent companies of large multinational enterprises (MNEs)?

Answer 38

Irish resident parent companies of large MNEs (with consolidated turnover >€750m in the preceding accounting period) must provide a Country-by-Country (CbC) report to Revenue within 12 months of the fiscal year end for each tax jurisdiction in which they do business.

Question 39

What is the Country-by-Country (CbC) report based on?

Answer 39

The Country-by-Country (CbC) report is based on the OECD/G20 Action Plan on Base Erosion and Profit Shifting (BEPS).

Question 40

How does Revenue handle the sharing of Country-by-Country (CbC) reports?

Answer 40

Revenue will share the CbC report with other tax administrations under automatic exchange of information provisions.

Question 41

What do transfer pricing rules apply and how do they determine if companies are associated?

Answer 41

Transfer pricing rules apply the arm’s length principle to trading and non-trading transactions between associated companies. Companies are considered associated if:

•	One controls the other, or
•	Both are controlled by the same person.

Question 42

Why are transfer pricing rules important, and how do they apply in Ireland?

Answer 42

Transfer pricing rules prevent associated companies from manipulating prices to maximise taxable profits in low-tax jurisdictions and minimise profits in high-tax jurisdictions. In Ireland, these rules apply to trading transactions between associated companies that result in the understatement of Case I and Case II income for Irish Corporation Tax (CT) purposes.

Question 43

What adjustment is required under transfer pricing rules if the amounts differ from the arm’s length amount?

Answer 43

If the amount payable exceeds the arm’s length amount, or the amount receivable is less than the arm’s length amount, then the Case I and Case II profits must be adjusted to reflect the arm’s length amount.

Question 44

How did FA 2019 change the transfer pricing rules in Ireland?

Answer 44

FA 2019 extended the transfer pricing rules to non-trading activities, including the disposal and acquisition of assets. This extension includes a potential charge to tax at 25% on certain cross-border financing transactions, such as inter-group lending.

Question 45

What are the transfer pricing requirements for non-resident companies under FA 2021?

Answer 45

FA 2021 introduced a requirement for non-resident companies carrying on a business in the State through a branch or agency to compute ‘relevant branch income’ (liable to CT) as if it were a separate and independent company. This calculation of branch income must be in accordance with OECD guidelines on transfer pricing.

Question 46

What exemptions exist for transfer pricing rules in non-trading transactions within Ireland?

Answer 46

Exemptions from transfer pricing rules apply for non-trading transactions where both parties are within the charge to Irish tax, and the transaction is non-trading in nature.

This exemption is only available to the supplier or acquirer where the transaction is assessed under Case III, IV, or V.

The exclusion only applies where the arrangement is for bona fide commercial reasons.

Question 47

What are the record-keeping requirements for transfer pricing?

Answer 47

It is necessary to retain records to determine whether an arrangement exists for transfer pricing purposes and to support the arm’s length nature of the arrangement. FA 2019 extended these rules to previously excluded SMEs, subject to a Ministerial Order being signed.

Question 48

What are the documentation requirements for SMEs under FA 2019, and what are they based on?

Answer 48

SMEs are obligated to retain records but are subject to reduced documentation requirements. Anti-avoidance legislation exists to ensure that arrangements are based on the substance rather than the form of the transaction.

Question 49

What defines a ‘small enterprise’ for transfer pricing purposes?

Answer 49

A ‘small enterprise’ employs fewer than 50 employees and has an annual turnover and/or balance sheet not exceeding €10 million.

Question 50

What defines a ‘medium enterprise’ for transfer pricing purposes?

Answer 50

A ‘medium enterprise’ is an enterprise that is not small and:

•	Employs fewer than 250 employees, and
•	Has a turnover not exceeding €50 million or total assets not exceeding €43 million.

Question 51

What are the documentation requirements for small and medium enterprises under transfer pricing rules?

Answer 51

Small and medium enterprises will be subject to reduced documentation requirements. They are obliged to have documentation for relevant arrangements with foreign counterparts where the consideration exceeds €1 million.