CORPORATE TAX RESIDENCY - (12.5% CT rate IRL) & UK - 21 September 2020

Tax Residency

An Irish tax resident company is liable to Irish corporation tax on its trading profits at 12.5%.  Therefore, it follows, that if the company’s trading profits are to be liable to Irish corporation tax at the 12.5% tax rate it must ensure that it is always considered an Irish tax resident company.  It is possible for a company with overseas operations to be Irish tax resident.

Different residency rules may apply to a company, depending on whether it was incorporated in Ireland before or after 1 January 2015. A company is deemed to be Irish tax resident if it was incorporated in Ireland on or after 1 January 2015. This will apply unless it is treated as a tax resident in another country under a Double Taxation Agreement.

As a guideline for determining residency Revenue may also look at where the company’s central management and control actually abides e.g. where the directors hold their meetings and whether real decisions affecting the company are taken at those meetings. 

The concept of central management and control is directed at the highest level of control in the company’s business and goes beyond the day to day control needed to carry out normal business transactions.  The board of directors would have the responsibility for exercising the central management and control of the company at the highest level and the place where the level of control is exercised is at the directors’ board meetings. 

 If XYZ Ltd is an Irish tax resident company and has business operations in both Ireland and the UK, it is liable to Irish corporation tax on all of its business profits earned throughout the world including the UK. 

However, UK corporation tax may have to be paid by XYZ Ltd in the UK on the portion of its business profits arising in the UK if it is regarded as trading through a branch in the UK. The extent to which the UK can also tax the UK business profits of XYZ Ltd is limited by virtue of the Double Taxation Agreement (DTA) between Ireland and the UK.

Article 8(1) of the DTA states: “the profits of an enterprise (XYZ Ltd) of a Contracting State (Ireland) shall be taxable only in that State (Ireland) unless the enterprise carries on business in the other Contracting State (UK) through a permanent establishment situated therein.  If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State (UK) but only so much of them as is attributable to that permanent establishment.”

Therefore if XYZ Ltd does not have a permanent establishment in the UK then only Ireland will have taxing rights on the UK profits. 

Permanent Establishment

XYZ Ltd will have a permanent establishment in the UK if it has any of the following:

• a place of management
• a branch
• an office
• a factory
• a workshop

Also it will have a permanent establishment “…if it carries on supervisory activities in that State (UK) for more than 12 months in connection with a building site, or a construction, installation or assembly project which is being undertaken in that State.” 

A non independent agent that habitually concludes contracts on behalf of XYZ Ltd in the UK would also cause the company to have a permanent establishment in the UK.   

Double Taxation

XYZ Ltd will be allowed to set any corporation tax paid in the UK as a credit against Irish corporation tax due on the same profits.  Therefore if the company makes a tax adjusted profit of €1,000,000 in the UK at CT rate of 19% it will pay €190,000 UK corporation tax.  The €125,000 Irish corporation tax payable on the same profits in Ireland is cancelled by the UK tax credit.  The overall result is a tax liability of €190,000 in the UK and none in Ireland on the tax adjusted profit of €1,000,000.

As the balance of the UK tax credit of €65,000 (€190,000 – €125,000) would not be allowed against Irish corporation tax it is important that as much profits as possible are repatriated to Ireland. This may be achieved.

Article 8(3) of the DTA states “In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.”  Therefore the Irish “head office” can charge a portion of its administrative costs to the UK.  This should result in a revenue deduction at 19% in the UK and a corresponding profit and loss account credit in Ireland.

It is essential that XYZ Ltd remains Irish tax resident in order to take advantage of the Irish corporation rate of 12.5% if it has a branch in the UK.

RMcH states: the above will apply in reverse for companies in the UK who wish to set up a branch in Ireland but advice should be sought.