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Ireland: Proposed controlled foreign company (CFC) regime

Ireland proposed CFC regime

Ireland’s Department of Finance announced a request for comments on a detailed outline of a proposed framework for Ireland’s controlled foreign company (CFC) regime, scheduled to be effective 1 January 2019. The closing date for comments is 28 September 2018

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Proposed CFC regime

The broad outline of Ireland’s choice of CFC regime under the framework set out in the European Union (EU) Anti-Tax Avoidance Directive (ATAD) was included in Ireland’s Corporation Tax Roadmap (released 5 September 2018) and confirms that Ireland would adopt “Option B” of the two permitted ATAD approaches to a CFC rule.

Ireland’s proposed approach would seek to apply the CFC regime to undistributed profits that have been diverted, by means of non-genuine arrangements, to a “low-taxed” CFC. 

  • The CFC regime would tax an Irish parent entity on an amount of profit that would be estimated using arm’s length, transfer pricing principles.
  • When there is an exercise in Ireland of “significant people functions” of the Irish parent company or of a group member that has been instrumental in generating the income of the CFC, the amount of the attributable income would be taxed under the CFC regime.
  • The rate of tax would depend on whether the income is trading (12.5%) or non-trading (25%) in character.
  • When there are no significant people functions in Ireland that are attributable to the management of the assets and business risks of the CFC, there would be no tax arising under the CFC regime.
  • No detail is given on separate provisions under consideration that could target undistributed profits of low-taxed cash-box companies with limited economic substance.

Other measures

The CFC regime outline suggests that Ireland’s policy makers are considering adopting a number of measures permitted under ATAD—measures that are designed either to avoid double taxation or to ease the administrative burden of the regime by:

  • Allowing taxpayers to exclude from scope a CFC that meets the low-tax test requirement
  • Excluding from the scope of the regime those CFCs with either low profits or low profit-margin activities
  • Excluding undistributed profits of the CFC that were priced on an arm’s length basis as well as those already within the scope of Ireland’s transfer pricing regime
  • Excluding from scope for a 12-month transitional period the profits of CFCs acquired from third parties, provided that the profits after this period are outside the charge of the CFC rule
  • Providing relief from double taxation by offsetting “creditable” foreign tax against Irish corporation tax on the CFC taxable profit

 

Read a September 2018 report prepared by the KPMG member firm in Ireland

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