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Irish proposals to tackle ‘stateless companies’

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As part of Budget 2014, the Irish minister for finance reconfirmed the government’s commitment to the 12.5% corporation tax rate. The minister published a new international tax strategy statement in order to provide a clear and accurate picture of Ireland’s corporation tax regime for the FDI sector. The key message was that Ireland is ‘open for business’ and is committed to maintaining an open, stable and competitive tax regime, which scores well in terms of good governance and transparency.

In his speech, the minister referred to the recent global debate on international rules for taxing multinationals and steps being taken by the OECD base erosion and profit shifting (BEPS) project to address tax strategies that exploit mismatches in different countries’ domestic tax rules. He confirmed that Ireland will be part of the international solution to this global tax challenge and committed to deal with the issue of ‘stateless companies’.

‘Stateless companies’ refers to Irish incorporated companies which, due to a mismatch between Ireland’s and other countries’ tax residency rules, are not resident in any tax jurisdiction. An Irish incorporated company is deemed to be Irish tax resident unless one of two exemptions apply. The double tax treaty exemption provides that where under the provisions of a double tax agreement (DTA) an Irish incorporated company is held to be resident in the DTA jurisdiction, it will not be held to be tax resident in Ireland. The active trading exemption provides that where a group is carrying on a trade in Ireland and is listed on certain stock exchanges, then an Irish incorporated company will not be held to be Irish tax resident if it is not managed and controlled in Ireland. It is this later exemption that has led to the ‘stateless’ company concept.

The draft Finance Bill (No. 2) 2013, which was published on 24 October 2013, includes a proposed amendment to this rule. Where an Irish incorporated company is managed and controlled in a DTA country and would only be regarded as tax resident in that country if it was incorporated there, and would be regarded as tax resident in Ireland if it were managed and controlled in Ireland (by virtue of the active trading exemption to the incorporation test applying), then the company will be regarded as Irish tax resident. This amendment has effect from 24 October 2013 for companies incorporated on and after this date, and from 1 January 2015 for all companies incorporated before the date of publication of the Bill.

So Irish incorporated companies, who do not fall to be Irish tax resident by virtue of the active trading exemption, but are not resident elsewhere under the terms of a DTA, will need to establish management and control in another jurisdiction if they don’t want the company to become Irish tax resident in the future. This new provision – which Ireland has introduced as it is recognising that, in the absence of the company establishing a ‘home’ in some other jurisdiction, the residence of such a company should default back to Ireland – will impact companies that are currently managed and controlled in a territory such as the US and not tax resident there due to the US’s incorporation test of residency. Ireland has said that it expects any further changes to be made only as part of a coordinated international response to the BEPS agenda.