Irish Law Changes for 'Stateless' Companies – Preparing for the Future
The Irish Minister for Finance today, Thursday, 24 October 2013, published the Finance Bill (No. 2) 2013 (the "Finance Bill").
As announced by the Minister in his Budget statement last week, the Finance Bill contains "a change to Irish company residence rules aimed at eliminating mismatches – that can exist between tax treaty partners in certain circumstances – being used to allow companies to be 'stateless' in terms of their place of tax residence."
Irish incorporated companies which are not resident in Ireland are used in significant international corporate structures, and the concept of a stateless Irish company has recently drawn considerable public and media comment. This new measure can be seen as part of Ireland's proactive approach in ensuring the Irish corporation tax system is robust internationally, such as its recent work in advancing the OECD's Base Erosion and Profit Shifting (BEPS) project and countering cross border 'double no tax' arrangements.
Irish Incorporated Companies – The Current Rules on Residency
In broad terms, an Irish incorporated company will automatically be tax resident in Ireland. The 'place of incorporation' test is subject to two exceptions: (a) the treaty exception; and, (b) the trading exception.
This trading exception is central to what is now commonly referred to as the 'double Irish' structure. By utilising the trading exception, it is possible to create a company which, although Irish incorporated, is not tax resident in Ireland and therefore generally not subject to Irish corporation tax. The company may also not be regarded as tax resident in any other jurisdiction, and this has led some commentators to describe such companies as stateless.
The trading exception is only possible where a number of conditions are satisfied. As an initial step, the company must not be centrally managed and controlled in Ireland. In practical terms this means that its board of directors, as the primary source of such control, must not meet in Ireland and must not exercise their powers in Ireland. In addition, in a typical structure, the stateless Irish company will be affiliated with a company which carries on an active trade in Ireland. The company must also be controlled by persons resident in a double tax treaty partner country, or be a subsidiary of an entity which is listed on a recognised stock exchange in such a country. In the most high-profile cases, the companies will be part of a US or UK listed group.
Irish Incorporated Companies – The New Rules on Residency
The effect of the draft legislation published today is that if such a company is managed and controlled in a treaty partner country, and that country applies a 'place of incorporation' test of residence, then the company will be Irish tax resident if it is not regarded as a tax resident of any territory.
In many cases, treaty partners would apply a concept of residence based on 'management and control', so would be outside the scope of this test. However, to the extent that is not the case (as is understood to be the position in the US), then a company falling within these new rules would be regarded as Irish tax resident and thus fully subject to Irish corporation tax.
The legislation is notable in that it codifies the concept of management and control which, to date, has largely been a test based on case law. Also, while the legislation does seek to implement the objectives stated by the Minister in his Budget speech, there are aspects that are unclear in their application; in particular the provisions regarding residence of the company in "any territory". Maples and Calder intends to make a submission to the authorities in that regard.
The new legislation, to the extent it is enacted into law with no modifications, will become effective from 1 January 2015 for existing companies and 24 October 2013 for new companies. It is expected that the Bill will be passed into law before the end of 2013.
Future Arrangements and Suggested Actions
Any companies affected by these changes, or that are establishing similar structures in the future, will need to ensure that the management and control of the Irish company is located outside of the relevant treaty partner country.
That will mean it will be important to definitively locate management and control in another country under the Irish law principles of tax residence. This will generally need to be a suitable third country and not a treaty partner.
The concept of management and control for Irish tax residence purposes is based on long established UK legal principles of tax residence, going back to the case of De Beers Consolidated Mines v Howe, which established the 'central management and control' test over 100 years ago.
We have significant experience in advising Irish holding companies and investment companies, including Irish companies with US public listings, in managing their corporate tax residence. Important factors in this regard are to ensure that management decisions only take place at board meetings, and that those board meetings are held outside of the treaty country in question and substantively in the third country. This involves working closely with the company in ensuring that these steps can be managed efficiently, particularly as regards the impact on key executives in the company.
In that regard, it would be prudent and a matter of good governance for existing and new companies affected by these changes to ensure that appropriate legal procedures and protocols are put in place for the company. In particular, Maples and Calder has advised clients on the formulation of a 'board protocol' which is considered and approved by the board of directors, and monitored on an ongoing basis, to ensure that residence is located where it should be under Irish tax rules. The board protocol is important evidential material, should there be enquires from a tax authority, as to the fact pattern in any particular case.
Another approach is to build in provisions in the charter documents or memorandum and articles of association of the company which are intended to vest management and control in a particular location. While this can be considered, it can be unduly restrictive in certain cases as a legal matter for the company, particularly if flexibility or changes are needed in the future, and in our view, the board protocol will often be more appropriate for the company. We would invite any contacts to discuss implementing this further with us as required.