Ireland Tax Alert: 2010 Finance Bill published

Ireland's 2010 Finance Bill, published on 4 February 2010, includes significant positive changes to the tax landscape, focusing on Ireland as a knowledge economy and an international headquarters location. The Bill includes the introduction of a transfer pricing regime. Given the focus on tax regulation globally, the introduction of formal transfer pricing rules was expected and should be broadly neutral as regards Ireland's attractiveness as a location for investment.


Intellectual property

A number of key changes have been introduced impacting Ireland's standing as a location in which to acquire - by purchase or by license - intellectual property (IP) for use or onward license.


Purchase of Intellectual Property

A number of practical improvements have been made to the IP regime, which was first introduced in May 2009 in anticipation of certain Obama proposals on taxation. The purpose of the law was to facilitate Irish subsidiaries of multinationals purchasing IP and obtaining an Irish tax deduction for the purchase price, thereby reducing the effective tax rate on the Irish profits below 12.5%.

The changes introduced in the Finance Bill include:

Reduction in the clawback period for IP allowances claimed: It is positive to see that the period during which a clawback of IP allowances claimed can occur has been reduced from 15 years to 10 years. Therefore, provided a company holds the qualifying IP and uses it for the purposes of its trade for at least 10 years, 100% of the expenditure should be allowed for tax purposes with no possibility of a subsequent clawback on a later sale.

In addition, the write-down period for the intangible asset in the accounts will also take account of any impairment charge which should accelerate the tax write-down period of IP assets.

Software: As expected, the Finance Bill brings the acquisition of certain software within the scope of the IP regime. The rationale for this change is to ensure that there is a single regime for tax depreciation on capital expenditure incurred on all IP-related assets.

As from 4 February 2010, capital expenditure incurred on the acquisition of software for use by a company in managing, developing or exploiting the software with the intention of receiving a royalty or other sum for the use of that software by other persons, will fall within the scope of the IP regime. Effectively, only end-user software acquired by a company for the purposes of its trade will still remain under the plant and machinery tax depreciation regime.

However, for a two-year transition period, a company that acquires software that would now qualify for the IP regime can elect for that software to fall within the old regime rather than the IP regime.

Know-how: The definition of know-how that can qualify for the IP allowances has been expanded to include secret processes or formulae concerning industrial, commercial or scientific experience and does not depend on the know-how relating to the manufacture or processing of goods or materials.

Expenditure on the application for the grant or registration of patents, copyrights, domain names, etc. is also included in the list of qualifying intangible assets, so long as it is recognized as an intangible asset in the accounts of the company.


Royalties receivable

The Finance Bill introduces a blanket unilateral relief for royalty income that forms part of the trading income of a company. In effect, as from 1 January 2010, foreign tax credit relief is available for foreign tax suffered on royalty income that is part of a trade, even where there is no treaty relief available. Previously such relief was only available for certain software development activities, but now applies in the case of all trades. This measure had been widely called for and is to be welcomed in light of the increased focus on attracting high value IP activities to Ireland.


Royalties payable

A further development is the removal of Irish withholding tax on payment of patent royalties or annual payments to overseas EU or treaty resident recipients provided they are liable to tax on same. This is a welcome, though limited, development in terms of enhancing the use of IP by Irish trading companies without adverse tax costs.


Ireland as a headquarters location

A number of measures have been introduced that enhance Ireland's position as a headquarters location.


Dividends

Finance Act 2008 introduced a 12.5% tax rate on the receipt by an Irish company of dividends out of the trading profits of a company that was resident in an EU Member State or a country that has concluded a tax treaty (DTA) with Ireland. Dividends paid out of the profits of a non-EU/DTA resident company were taxable at 25%. In both cases, credit was available for foreign tax suffered, reducing the effective rate.

The Finance Bill substantially broadens the application of the 12.5% rate to include dividends paid out of trading profits by a non-EU/DTA resident company, provided the payer company is listed, or is a 75% direct or indirect subsidiary of a company that is listed, on a recognized stock exchange either in Ireland, an EU/DTA country or other stock exchange approved by the Minister for Finance.

Therefore, as from 1 January 2010, where a payer company is part of such a listed group, dividends received by an Irish company out of trading profits will be taxable at 12.5% with credit for foreign tax, even where the company is not resident in an EU/DTA jurisdiction.

Other changes include a clarification of the computation of tax on overseas dividends and an exemption from Irish tax on dividends received on portfolio investments (i.e. companies with shareholdings or voting rights of not more than 5%) where the dividend income is trading income.

In addition, the Finance Bill reduces the administrative requirements that must be complied with for an Irish company to pay a dividend free of withholding tax to a nonresident shareholder. The requirement for the nonresident shareholder to provide a tax residence and/or auditors certificate to obtain exemption from dividend withholding tax has been removed. Instead, a self assessment system will apply under which a nonresident shareholder company will provide a declaration to the Irish resident company that it is a qualifying nonresident person. Such declarations will be valid for a period of five years from the end of the year in which the declaration is made.

Changes have also been made so that statements given to recipients of distributions can be done by electronic communication.

These changes should substantially reduce the administrative burden associated with paying dividends.

All of these changes should make Ireland more attractive as a holding company location.

As a separate point, an anti-avoidance measure has been introduced such that, with effect from 4 February 2010, certain dividends received by an Irish company from a company that has migrated its tax residence to Ireland may not qualify as exempt franked investment income. The provision will not apply where the company migrated its tax residence to Ireland more than 10 years before the dividend has been paid. This measure is targeted at particular tax avoidance structures.


Financing transactions

Financing transactions for corporates could be adversely affected by a change that provides that relief from Irish withholding tax on interest payable by companies in the course of a trade to an EU/DTA resident recipient only applies where the interest payment is liable to tax in the recipient's country. If this condition is not satisfied, clearance will have to be obtained under the relevant treaty to pay the interest gross, which will add to the administrative burden. Further clarification is required and financing transactions may have to be reviewed in the context of this change.


Transfer pricing

The objective of the transfer pricing law is to ensure that an arm's length price is charged in arrangements (arrangement is widely defined as any agreement or arrangement of any kind whether or not it is, or is intended to be, legally enforceable) involving the supply or acquisition of goods, services, money or intangible assets between connected persons where the profits or losses of either company are chargeable to Irish tax as trading profits or losses. Corporates are connected where there is at least a 50% relationship, but can be connected in other circumstances.

The transfer pricing regime will not apply to financing activities, such as an isolated interest-free loan. Financial services treasury companies will need to evaluate the impact of the law on their loan books and other financing transactions. The law also will not apply to isolated IP transactions such as royalty-free structures, but again where the company is carrying on a trade of managing IP, a full review of transactions should be undertaken.

The law applies to both domestic and cross-border trading transactions between companies and to Irish branches of foreign companies that are within the charge to Irish tax on their trading activities. Transactions between head offices and branches do not fall within the scope of the regime.

There is a full exemption for small and medium-sized entities. A small/medium-sized entity is one with a staff head count of less than 250 and an annual turnover of EUR 50 million or less, or a annual balance sheet total of EUR 43 million in assets or less, which figures are assessed annually on a group-wide basis.

Companies are required to have available records that would reasonably be required for the purpose of determining whether the trading income of a company is computed by virtue of the arm's length principle. It should be possible to rely on counterparty documentation to meet the Irish documentation requirement.

The law is to be interpreted in accordance with OECD transfer pricing guidelines and specifically mentioned are the report on intangible property and the report on cost contribution arrangements. As would be expected, tax treaty provisions take precedence over this law.

The legislation contains provisions for grandfathering of arrangements made before 1 July 2010.