Business Taxes

1.2.Explain terms used when calculating corporation tax

1.2.1.Profit

As you have seen, “profits” in the context of a company means “income plus chargeable gains” (Section 4 TCA 1997) and refers to a company’s income from all sources as well as chargeable gains.

“Income” is not defined for corporation tax purposes generally. Income is computed in accordance with income tax principles under the Schedules and Cases which apply for income tax purposes (see Section 76 TCA 1997). The computation of a company’s chargeable gains for corporation tax purposes is covered in section 1.6.

There are some exclusions from “income” and “chargeable gains” for corporation tax purposes. For example, dividends received by Irish resident companies from other Irish resident companies are not taken into account in calculating the recipient company’s income (i.e. they are exempt from corporation tax – referred to as Franked Investment Income). Such dividends are subject to income tax in the hands of an individual under Schedule F.

1.2.2.Company

You will have considered the legal definition of a company during Law Fundamentals.

For corporation tax purposes, a “company” is defined in Section 4 TCA 1997 and includes any body corporate whether it is actually legally formed as a company or not. For example it includes certain semi-state boards which are not formed as legal companies, e.g. RTÉ and ESB.

However, it excludes the following:

The Health Services Executive

Vocational Education Committees

Local Authorities

Therefore, a “company” for corporation tax purposes is very broad and excludes only those types of bodies corporate which are referred to above.

1.2.3.Branch

As you will learn, if a company is not resident in Ireland it may still be subject to corporation tax if it has a taxable presence in Ireland i.e. if it carries on its trade through a branch or agency in Ireland.

A branch or agency is defined in Section 4 TCA 1997 as “any factorship, agency, receivership, branch or management”. Therefore, if the non-resident company has a factory or office in Ireland this is likely to constitute a branch. Ireland’s extensive double tax treaty network may result in certain branches or agencies falling outside the scope of Irish corporation tax where the level of activities carried on by the non-resident company in Ireland are such that they fall within one of the exemptions listed in the relevant treaty. The tax treatment of branches and the exclusion from tax of certain branch activities are covered in more detail your Part 3 studies.

1.2.4.Residence of companies

There are two methods for deciding the place of residence of a company. One comes from case law (1.2.4.2) and the other is in the TCA 1997 (1.2.4.1).

1.2.4.1Legislative test

In order to address some of the international coverage in relation to Ireland’s corporation tax legislation, specifically in relation to residency and our 12.50% rate, Recent finance acts have made significant amendments to our corporate residency legislation. The effect of the changes over the past two years has resulted in two sets of rules being in place during a transitional period of time.

In order to give companies time to organise their affairs the changes will not affect companies incorporated before 1 January 2015 (subject to anti-avoidance legislation noted below) until 1 January 2021.

Section 23A TCA 97 legislates for company residence and references to the original section relate to the law that deals with companies incorporated prior to 1 January 2015 who will utilise this legislation until 31 December 2020. References to the current legislation relates to company’s incorporated on or after 1 January 2021 who use the current legislation.

Companies Incorporated on or after 1 January 2015

The current Section 23A TCA 97 states that all companies incorporated in Ireland are deemed to be tax resident here, s23A(1) TCA97, unless they are resident in another country under a double tax treaty, s23A(2) TCA97. S23A(3) confirms that the legislation is in addition to the existing central management and control test (1.2.4.2).

The section effects companies incorporated on or after 1 January 2015 and for companies incorporated before this date, it comes into effect from 1 January 2021.

As an anti-avoidance measure the section will also apply to companies incorporated before 1 January 2015 if there is both a change in ownership and nature of the trade before the 1 January 2021 implementation date, these changes occurring within a period of up to six years. This will bring this date forward to the date of the change. This measure was primarily aimed at restricting the incorporation of companies between the date of the Finance Bill, 23 October 2014 and 31 December 2014 in order to avail of the extension to 1 January 2021 for existing companies.

Companies Incorporated before 1 January 2015

For companies incorporated before 1 January 2015 and not subject to the anti-avoidance rules noted above the recent amendments will not apply until 1 January 2021. References in this part to Section 23A TCA 97 are to the original legislation that existed prior to the amendments introduced for companies incorporated on or after 1 January 2015.

The general rule is that all companies incorporated in Ireland are resident in Ireland. This rule is set out in Section 23A(2) TCA 1997.

There are two exceptions to (or exemptions from) this rule. They are known as the trading exemption and the treaty exemption and are set out in Section 23A(3) and (4) TCA 1997 respectively. Where one (or both) of these exemptions applies, the residence of the company is deemed to be “where the central management and control actually abides”. This is a residence test that was established by case law.

The trading exemption (Section 23A(3) TCA 1997 (original section)

The trading exemption applies to an Irish incorporated company, where it is a “relevant company” and:

it carries on a trade in Ireland or

is related to a company which carries on a trade in Ireland.

A “relevant company” is a company:

which is under the direct or indirect control of persons who are resident in an EU Member State or state with which Ireland has a double tax treaty and is not under the control of persons who are not so resident or

which is, or is related to, a company quoted on a stock exchange in an EU Member State or country with which Ireland has a double tax treaty.

For this purpose,

companies are “related” to each other if one company is a 50% (direct or indirect) subsidiary of the other or both are 50% subsidiaries of a third company. In determining whether the 50% relationship exists, one company must be entitled to 50% of the profits available for distribution, the assets on a winding up and the voting rights of the other company (i.e. Sections 412-418 are applied in determining whether the required relationship exists – these provisions are covered in detail at Part 3).

“control” is construed in accordance with the meaning of control for close company purposes (i.e. in accordance with Section 432 TCA 1997). Where the trading exemption applies, the place of incorporation residence test does not apply to the company. The central management and control test applies instead.

The treaty exemption (Section 23A(4) TCA 1997 (original section)

The treaty exemption means that, where a company is regarded as not resident in Ireland under the provisions of a DTA it is not subject to the place of incorporation test of residence. Instead the central management and control test applies. You will learn more about this in your Part 3 studies.

Tax residency of “Stateless” companies (s 23A(5) TCA 97 (original section)

Subsection (5) was originally introduced to address concerns in relation to the taxation of multinationals incorporated in Ireland which due to anomalies between Irish and other jurisdiction’s tax laws were not tax resident in any country. These are commonly known as “stateless companies”.

The subsection ensures that if a company is incorporated in Ireland but is not currently tax resident here or in an EU/DTA country it will become tax resident here in the following situation:

1. The company is managed and controlled in a relevant territory (EU or DTA country) and if it was managed and controlled to the same extent in Ireland it would have been resident here,

2. That relevant country only has a place of incorporation test and not a central management and control test, see below.

The rules apply to companies incorporated in Ireland from 24 October 2013 and to all other companies from 1 January 2015. The current section 23A TCA 97 will not affect these companies until the earlier of either 1 January 2021 or the happening of a change in control and nature of the trade.

Example 1.1

Apple Ltd was incorporated in Ireland on 25 November 2014. The shares of Apple Ltd are owned by Tim Blake and Frank Hughes who are both resident in the UK for tax purposes. Apple Ltd carries on a trade in London but has no activities in Ireland. In this case, the trading exemption provided for companies incorporated before 1 January 2015 does not apply as Apple Ltd is not carrying on any activities in Ireland and is not related to any other company (as it is owned by individuals) which might be carrying on a trade in Ireland.

Example 1.2

Lemon Ltd was incorporated in Ireland on 10 June 2014 and carries out a trade in Ireland. Lemon Ltd is a 100% indirect subsidiary of Fruit Inc. Fruit Inc’s shares are listed on the New York Stock Exchange. In this case, Lemon Ltd is a “relevant company” because it is related to a company whose shares are quoted on a stock exchange in a country with which Ireland has a double tax treaty and carries out a trade in Ireland. The trading exemption applies and Lemon Ltd would not be regarded as resident in Ireland by virtue of being incorporated in Ireland. As Lemon Ltd is not automatically resident in Ireland, it will need to demonstrate that it is managed and controlled in Ireland if it wishes to be treated as resident in Ireland for tax purposes (e.g. to avail of Ireland’s double tax treaty network). Under section 23A(5) TCA 1997 (original section) if Lemon Ltd is managed and controlled in the US but not tax resident in the US it will be tax resident in Ireland.

Example 1.3

Orange DAC was incorporated in Ireland on 30 April 2018. Fruit Inc owns 75 “A” ordinary shares which entitles Fruit Inc to 25% of the voting rights of Orange DAC, 75% of profits available for distribution and 75% of the assets on a winding up. John Keane (an Argentinian resident individual) owns 25 “B” ordinary shares which entitles him to 75% of the voting rights of Orange DAC, 25% of the profits available for distribution and 25% of the profits on a winding up. Fruit Inc carries on a trade in Ireland through a branch. As Orange DAC is incorporated in Ireland and is not tax resident in any other EU/DTA country it is tax resident in Ireland.

1.2.4.2Central management and control test

As we have seen, if the incorporation test doesn’t apply, a company is resident in the place where it is centrally managed and controlled. The central management and control test also applies to non-Irish incorporated companies.

Central management and control is a concept that relates to the highest level of control as opposed to control of day-to-day operations of a company. Basically it involves the strategic control of the company, including the formulation of company policy, how the company deals with financing and capital structure, etc.

Where the central management and control of a company abides is ascertained by examining by whom and where strategic control of all operations occurs and is a question of fact. Based on the facts of the various leading cases on company residence, it is possible to compile a list of questions that can be used to determine the residence of a company:

Where are the questions of important policy determined?

Where are the directors’ meetings held?

Where are the majority of directors resident?

Where are major contracts negotiated or agreements concluded?

Have the directors delegated any of their powers? To whom and to what extent?

Where are the shareholders’ meetings, both general and extraordinary, held?

Where is the head office of the company?

Where are the books of account kept?

Where are the accounts prepared and examined?

Where are the accounts audited?

Where are minute books kept?

Where are company seals kept?

Where is the share register kept?

From where are dividends, if any, declared?

Where are the profits realised?

Where is the company’s bank account on which the secretary etc. draws?

Where is the company incorporated?

If all of the strategic decisions affecting a company are taken by the company directors, then the fact to be determined is where those decisions are taken and hence control is exercised. No single factor above would in itself determine the tax residence of a company. However to be satisfied that the central management and control of a company rests in a particular jurisdiction, you would expect that jurisdiction to be the answer to the majority of the above questions.

Some factors listed above will carry more weight than others. For example, where the directors’ meetings take place (assuming that the directors are the persons who make key policy decisions on behalf of the company and are not simply acting in accordance with the instructions of others) is likely to be a key factor and would prove a strong indication of where the company is resident for tax purposes.

Example 1.4

Dutch BV is incorporated under Dutch law. However, its central management and control is in Ireland and it is therefore an Irish resident company.

Example 1.5

Fork Ltd, an Irish resident company carries on trading activities in Ireland and Japan and has a bank account in Switzerland. Fork Ltd will be subject to Irish corporation tax not only on the profits of its Irish operations but also on the trading profits arising in Japan as well as its investment income in Switzerland (i.e. it will be taxable on its worldwide income). Fork Ltd may also be liable to tax in Japan and Switzerland and may be entitled to a foreign tax credit for taxes paid in those jurisdictions in calculating its liability to Irish tax. Foreign tax credits are covered in detail in your Part 3 studies.

Example 1.6

Sure Limited is a Dublin based trading company incorporated in Ireland in 2018. It is owned and controlled from Los Angeles. As the US only operates an incorporation test, Sure Limited would not be tax resident in the US. It is treated as being tax resident in Ireland under s 23A(1) TCA 97.

Example 1.7

Madison Limited is a company incorporated in Ireland in March 2018. The company operates a Brazilian mine and their board of directors hold all of their meetings in that country. The company undertakes no activities in Ireland. Under the management and control test the company is not deemed to be tax resident in Ireland. However, S23A(1) TCA97 deems the company to be tax resident in Ireland and it cannot avail of the double tax treaty exemption as Ireland does not currently have a treaty with Brazil.

When a company is incorporated or commences to carry on a trade, profession or business in Ireland they must, within 30 days, provide various details to the Revenue, under s.882 (2) TCA 1997, including:

The date the activity commences

The name of the company, its registered office address and the address of its principal place of business

The name of the company secretary

The date to which accounts will be made up

These details are typically provided to Revenue when registering the company for taxes by completing an online Form TR2 (Companies).

Where the company is incorporated but not resident in Ireland, the following additional information is required (Section 882(2)(c)(ii)):

The territory in which the company is resident;

Where the trading exemption (under the original Section 23A(3) (as outlined above) applies, the name and address of the company which is trading in the State;

Where the treaty exemption in Section 23A(2) (current section) or Section 23A(4) (original section) (as outlined above) applies, if the company is controlled by another company whose shares are traded on a stock exchange in an EU or DTA country, the registered office of that company and in all other cases, the names and addresses of the individuals who are the ultimate beneficial owners of the shares.

Case law

Calcutta Jute Mills Company v Nicholson [1876] 1 TC 83

One of the first cases to consider a company’s residence was Calcutta Jute Mills.

The company held board meetings and annual general meetings in London in an office lent by a director but everything of a practical nature was in India. It claimed that it was not resident in the UK and that its trade was not carried on in the UK.

The judgments in Calcutta Jute Mills are the basis on which our later residence ideas rest and on which the case which became the authority on residence (De Beers) drew heavily.

The Judges, while looking at the board of directors and giving much weight to its role of management in the UK also took into account the fact that annual general meetings were in the UK and the company was UK incorporated. The people in India were mere agents acting solely on behalf of the company.

The UK courts found the company to be UK resident.

Case law

Todd v The Egyption Delta Land And Investment Company Ltd [1928] 14 TC 119

The House of Lords in the UK held in this case that the bare fact of incorporation in the UK did not constitute a company’s residence in the UK. Instead, where the directors’ meetings were held was found to be more important.

Case law

De Beers Consolidated Mines Ltd v Howe [1903–1911] 5 TC 198 and 9 TC 356

This case is the most widely cited in relation to company residence and is the one on which the “management and control” test is based where a company’s residence is not decided under s.23A TCA 1997.

The courts in this case decided that the place where a company resides is the place where it carries on its real business. The judge in the De Beers case said:

I regard that as the true rule; and the real business is carried on where the central management and control actually abides.”

The judge in the case also noted that:

“The place of incorporation, while a factor, is very much subsidiary to other considerations. Control has more to do with where the directors hold their meetings and whether real decisions affecting the company are taken at those meetings.”

Case law

Untelrab Ltd, Unigate Guernsey Ltd and Unigate Overseas Ltd v McGregor (HMIT) [1995] SP C 55

In this UK case, it was decided that two subsidiaries of the Unigate group which were registered overseas were actually resident there.

The UK Revenue had argued that because the two companies (used as financial vehicles of the group) made investments according to the policy and wishes of the UK parent company, they were UK resident. However, the UK Special Commissioners found that neither company merely rubber-stamped instructions from the UK parent, nor would have taken a decision which the directors considered unwise or improper. Hence, the central management and control of the companies was found to be overseas and not in the UK.

The Inland Revenue did not appeal the Special Commissioners decision in this case. It should be noted that the case involved a public company at parent level. A similar result may not have emerged in a private or family company situation, where the policy function would be likely to be much more concentrated.

Case law

Wood v Holden [2006] STC 443

This case was about a non-resident subsidiary. Despite the fact that the subsidiary board acted upon the instructions of the resident parent, the company was held to be non-resident as the subsidiary’s board consisted of sound commercial businessmen who would be capable of not carrying out an instruction if they knew it to be for example, illegal.

The judge in this case also observed that, where a company incorporated in a jurisdiction other than that of its parent holds infrequent or short board meetings in that jurisdiction because it has little or no activity (e.g. in the case of a pure holding company), that does not mean that it is managed and controlled in the jurisdiction of the parent company. If little activity is required, the fact that there is little activity is not significant – only where that activity takes place is significant.

1.2.4.3Non-resident companies – Irish branch

Section 25(1) TCA 1997 provides that a company which is not resident in Ireland (i.e. a non-Irish resident company) is only subject to corporation tax if it carries on a trade in Ireland through a branch or agency.

If it does carry on a trade in Ireland then it is subject to Irish corporation tax on:

Any trading income arising from the branch or agency,

Any other Irish source income

Any income from property or rights used by, or held by, or for, the branch or agency, and

Chargeable gains arising from assets which are situated in Ireland (under s.533 TCA 1997) and which are used in or for the purposes of the trade carried on through the branch or agency (NOTE – such assets remain chargeable assets of the non-Irish resident company even when the company is no longer carrying on a trade in Ireland or the assets have ceased to be used for the purposes of the trade carried on through a branch or agency in Ireland. See Section 29(3)(c). If the company continues to carry on a trade and is subject to corporation tax, any gain will also be subject to corporation tax. If the company is no longer within the charge to corporation tax, capital gains tax will apply).

We considered the meaning of “branch or agency” earlier in this chapter.

Case Law

Murphy v Dataproducts (Dublin) Ltd (29 January 1988 HC)

This case considered the meaning of “income from property or rights used by, or held by or for, the branch or agency”. The company was incorporated in Ireland but its residence was moved to the Netherlands in 1979. The company continued to carry on its manufacturing business through its Dublin branch. The company opened a bank account in Switzerland into which excess profits from the Dublin branch were lodged. The bank account was managed for investment purposes from the Netherlands in accordance with decisions of the company’s US parent. Some of the money in the account was returned to Dublin to meet operational shortfalls but management in Dublin had no control over the account or the investment of the money held in the Swiss account.

The High Court held that that the moneys were not “used by” the Irish branch but were used by the company that controlled the bank account. The money withdrawn was used by the company for the Irish branch but not used by the branch. Money returned to Dublin became money “held by or for” that branch.

Example 1.8

Dutch Company BV is not resident in Ireland but it has an Irish manufacturing operation. Dutch Company BV receives rental income from an investment property in Cork.

It will be subject to Irish corporation tax on the trading income arising from the branch and on related investment income e.g. income on deposits controlled by the branch. It will also be subject to corporation tax on chargeable gains arising on assets which were used for the purposes of the Irish trade carried on through the branch and on the rental income from the investment property.

If a non-resident company generates income from deposits which are not under the control of the branch such profits will not be subject to corporation tax in Ireland unless the income from the deposit is Irish source income (subject to any exemptions that may apply – see Section 198 TCA 1997).

1.2.4.4Non-resident companies – No Irish branch

Generally, a company is not subject to income tax in Ireland. Section 21(2) TCA 1997 sets out the circumstances where a company is not subject to income tax as being where:

(a) the company is resident in Ireland or

(b) the company is non-resident but it’s income is within the charge to corporation tax (because it carried on a trade in Ireland through a branch or agency)

A non-resident company which does not have a branch or agency in Ireland does not fall within either of the two circumstances above and will be subject to income tax on any income derived from sources in Ireland. The rate of income tax applicable is set out in Section 15 TCA 1997. Section 15(1) provides that income tax is to be charged at the standard rate (currently 20%). Note that the remaining subsections refer to the income tax rates applicable to individuals only and are not relevant in determining the rate applicable to companies that are subject to income tax.

A non-resident company, just like a non-resident individual, is subject to CGT on any disposal of specified Irish assets.

Example 1.9

ABC Limited is resident in Ireland. It will be subject to corporation tax on its worldwide profits (including gains) regardless of where they are generated.

Example 1.10

DEF Limited is not resident in Ireland. However, it carries on a trade through an Irish branch. It will be subject to corporation tax on the profits and gains arising in or to the branch or other Irish source income but not on income not connected with the branch (e.g. profits from another overseas branch) or from non-Irish sources.

Example 1.11

XYZ UK Limited is a non-Irish resident company (it has no branch etc in Ireland). Its only source of Irish income is derived from an Irish property that it has leased to a third party. It will be subject to Irish income tax on this income.

If XYZ UK Limited has no Irish source income then obviously it would not be subject to Irish tax (neither income tax nor corporation tax.)

Key Point

A company resident in Ireland pays corporation tax on its worldwide profits.

Figure 1.1. The corporate tax residence tests – incorporated from 1/1/2015

A. Overview of the tax residence tests – incorporated from 1 January 2015

B. Overview of the tax residence tests – incorporated before 1 January 2015

Figure 1.2. The territorial scope of Irish corporation tax

Task 1.1

Fried Ltd. is incorporated in the State on 27 May 2014 on behalf of an individual resident in Columbia who controls the company. The memorandum of association allows the company to carry on a very wide range of trading, investment and other activities although none of these are intended to take place in the State.

The directors of Fried Ltd. never enter the State, no meetings of any kind are held here so that the company is not managed and controlled in Ireland.

Where is the company resident?

Task 1.2

A French incorporated company whose centre of management and control is Paris also opened a factory unit in Naas where a small workforce manufactures clocks. These clocks are sold from this Naas factory.

Is the company Irish resident?

Task 1.3

A German company purchased a factory workshop in Galway. One of the German managers moved to Galway, a number of staff were employed and parts for machines were produced in Ireland for export to customers in Germany.

How much, if any, of the German company’s income is subject to Irish corporation tax?

Task 1.4

Alpha Ltd is a UK incorporated company that manufactures clothes. It has several factories in England, France and Germany and a warehouse and offices in Ireland. All of the directors of Alpha Ltd. live in Ireland. Both the directors’ and shareholders’ meetings take place in Ireland.

Is Alpha Limited tax resident in Ireland?

Task 1.5

Delta Ltd is a company incorporated in Ireland. In 2014, all of the company directors, who are the sole shareholders in the company, moved to a newly built modern factory and offices in Rotterdam but still kept the factory in Ireland open. The directors previously managed the operations of the Irish factory from Rotterdam.

Delta Ltd’s centre of management and control from 2015 onwards is the Netherlands.

Is the company Irish tax resident in 2015 and future years?

Task 1.6

State the consequences of a company being:

(a) resident in Ireland

(b) not resident in Ireland but

(i) with an Irish branch

(ii) with no irish branch

1.2.5.Accounting periods

This is a fundamental concept in corporation tax and one with which you must be very familiar.

The function of an accounting period for corporation tax purposes is effectively the same as an income tax year for income tax purposes i.e. it is the trigger point for determining a company’s compliance obligations (pay and file) and is the period by reference to which a company’s profits are calculated. This is set out in Section 27 TCA 1997.

You should note that this is different to an accounting period for accounting purposes as set out in Financial Reporting and Tax accounting fundamentals.

Maximum period

For tax purposes, an accounting period cannot extend for more than 12 months. This applies notwithstanding that the company may make up its accounts for a longer period. In such circumstances the longer accounting period is broken up into separate accounting periods for tax purposes.

Example 1.12

ABC Limited prepares its accounts for the 18 month period ending 30 June 2018. For tax purposes it will be deemed to have two accounting periods as follows:

Year ended 31 December 2017 (12 months)

Period ended 30 June 2018 (6 months)

Example 1.13

DEF Limited made up its accounts for a 14 month period ending 31 March 2018. For tax purposes its accounting periods will be as follows:

Year ended 31 January 2018 (12 months)

Period Ended 31 March 2018 (2 months)

It should be noted that a company’s accounting period can be shorter than 12 months. For example, it may make up accounts for a 9 month period ending 31 December 2018. This 9 month period would be treated as an accounting period for tax purposes.

Commencement/cessation

Section 27(2) TCA 1997 sets down rules for triggering a commencement of an accounting period. They are as follows:

A company commencing to trade

A company becoming resident in Ireland

A company acquiring a source of income

For tax purposes, an accounting period ceases on the occurrence of any of the following events:

Expiration of 12 months from the beginning of the accounting period (as this is the maximum length of an accounting period for tax purposes)

Accounting date of the company

A company ceasing to trade

You should be very familiar with the events which determine the commencement and cessation of an accounting period.

The following example illustrates the operation of the above rules.

Example 1.14

XYZ Limited was incorporated on 1 January 2017. Its shareholders subscribed for share capital on 1 March 2017 and the cash of €50,000 was immediately put on deposit with Bank Plc. On 1 May 2017, the company commenced to trade.

It made its first set of accounts up for an 18 month period ending 30 June 2018.

The accounting periods of the company for this 18 month period are as follows:

Accounting period Reason
1 March 2017 to 30 April 2017 XYZ Limited acquires a source of income (deposit with Bank Plc triggers an interest income source) so that an accounting period begins. It ceases on 30 April as the company then commences to trade.
1 May 2017 to 30 April 2018 A new accounting period begins on 1 May because the company commenced to trade. It ceases on 30 April because 12 months is the maximum length of an accounting period.
1 May 2018 to 30 June 2018 Accounting date of company.

Task 1.7

State the events which trigger a commencement or cessation of an accounting period.