4.1 Malta-Ireland double taxation
In Finance Act 2014 Ireland introduced legislation to target aggressive tax planning involving the so called “double Irish” structure. Under the structure Irish incorporated but non-resident companies could be established to hold valuable intellectual property assets and generate royalty income from same with minimal tax cost. Based on Irish tax legislation that applied prior to the Finance Act 2014 amendments, such entities were not regarded as resident for tax purposes in Ireland with the effect that Irish corporate tax did not arise on the royalty income. Due to significant negative publicity Ireland introduced legislation to abolish the anomaly in Irish legislation.
Whilst the legislation effectively abolished the double Irish structure, it was however possible to obtain a similar tax treatment with an Irish incorporated but Maltese tax resident company. This structure (referred to as the “Single Malt”) was not impacted by the changes in the legislation introduced in Finance Act 2014. The tax arbitrage arose by virtue of the interaction between Irish and Maltese domestic tax legislation and the provisions of the Ireland/Malta tax treaty, which effectively facilitated double non-taxation.
In 2018 Ireland and Malta entered into a Competent Authority Agreement under Article 24 of the Ireland/Malta double taxation treaty. In effect the jurisdictions have agreed that where the interaction of the treaty provides for the potential for double non-taxation then the provisions of the treaty facilitating this aggressive tax planning will not apply. Such an Irish incorporated company will be treated as Irish resident. The competent Authority Agreement has effect for taxable periods ending on or after a period of six months after the Multilateral Instrument is ratified by both Malta and Ireland. As Ireland and Malta ratified the MLI in April and May 2019 respectively the provisions will now apply.
These new provisions should be carefully considered by any corporate groups that have Irish incorporated but Maltese resident companies in their structures.
4.2 Transfer pricing
Ireland has had formal transfer pricing legislation since 2011. In Finance Act 2019 Ireland’s transfer pricing rules were overhauled quite significantly whereby, the 2017 OECD transfer pricing guidelines were effectively brought into Irish domestic legislation. The new changes came into force on 1 January 2020.
One of the most material changes to out transfer pricing legislation is the extension of transfer pricing to non-trading transactions. Previously Irish transfer pricing legislation only applied to trading transactions. This legislation will impact on group structures where interest free funding loans may have been granted by Irish companies to other group companies. Note however that the extension of the legislation to non-trading transactions does not apply where both parties to the transaction are within the charge to Irish tax. The notional interest arising will be treated as passive income subject to the 25% rate of corporation tax.
Whilst there is still currently an exclusion for SMEs, it is proposed that transfer pricing legislation will be extended to SMEs. The date of implementation is subject to a Ministerial Order.
Irish corporate groups should review their structures and in particular any financing arrangements in place that involve the granting of interest free loans to related companies in other jurisdictions in order to determine whether the new legislation applies to them.
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