Double Tax Ag Corp

Double Tax Agreements

The model DTA agreement by OECD was updated in 2017 at the same time as the Multilateral Instrument. OECD publishes detailed commentary on its meaning and interpretation. This is recognised as an aid to interpretation.

States  may enter Double Taxation Agreements. They may file reservations and observations. They may limit the effect and application of the Double Taxation Agreement.

Double Taxation Agreements may be amended by the Multilateral Instrument. Ireland has filed reservations and limits on the application to the multilateral agreement, so its application and  limits and reservations must be considered.

The Multilateral Instrument restricts taxpayers’ entitlements to benefits under a treaty. There are two methods of limiting benefits: the limitation of benefit provision which restricts the benefit to persons who are resident in the Double Taxation Agreement country and also qualified, and the principal purpose test by which tax authorities can rely on to deny relief if the principal purpose is to obtain double taxation relief.

The mutual agreement procedure contemplates tax authorities agreeing on a consistent approach and procedure in relation to taxes. They have become more common.

DTA General Principles

The general principles are as follows:

• Income from immovable property is taxed in the country in which it is located.
• Business profits from a permanent establishment and related royalties are taxed where it is established.
• Gains from the disposal of property are taxed in the country where it is located.
• Remuneration from private employment is taxable in the country in which the employment is exercised if the employee is present for more than 183 days in the preceding 12-month period beginning or ending in the fiscal year concerned.
• Directors’ fees are taxable if the company is a resident of the country concerned.
• Income from personal activities exercised in the country is taxable in that country, according to Article 17.
• Dividends may be taxed in the country of source up to 15% of the gross amount in the case of individuals. Interest can be taxed in the source country up to 10% of the gross amount.
• Salaries, wages, and pensions paid by a state or political subdivision or local authority are taxable by that state.

USC generally counts for income tax under the definition of income in Double Taxation Agreements.

Resident Taxpayers

Taxpayers who are resident are subject to income tax on

• private sector pensions,
• business profits not attributable to a permanent establishment in the source country,
• capital gains from the disposal of shares and securities (subject to exceptions),
• royalties (subject to exceptions), and
• remuneration in private sector employment exercised in another country if the employee is present for at least 183 days in a 12-month period in the country of residence in any 12-month period beginning or ending in the fiscal year concerned.

Payments to a student or business apprentice for the purpose of maintenance, education, and training are also considered.

DTA Application

The Double Taxation Agreement overrides domestic statutes in areas to which it applies. It applies to residents of one of the contracting states. This is different from the concept of residence in the state concerned under their domestic tax laws.

Where an individual is a resident in two states, the treaty provides for tests to determine the country “of” residence for the purpose of the Double Taxation Agreement. This will ensure he is a resident “of “one country only, referred to as fiscal domicile. This will determine which state taxes the income and which gives credit.

A company or corporate entity is subject to Irish tax if it is resident in Ireland or if it conducts business through a branch or agency in Ireland. It is also subject to Irish taxation on Irish-sourced income, regardless of its residence or whether it has a branch in the state.

Non-Irish resident companies are liable to capital gains tax on the disposal of specified assets, principally land and companies deriving the majority of their assets from land, as well as certain other real property-type assets.

Under double taxation agreements, business profits are taxed only in the state of residence unless the company conducts business in the other state through a permanent establishment in that state. In the case of interest and royalties payments connected with a permanent establishment, taxing rights reside with the state of the permanent establishment, even for a non-resident company.

Ireland taxes non-resident companies that carry on trade in the state through a branch or agency, which may be narrower than the above category.

Corporate Residence

Under the standard Double Taxation Agreement, residence was determined by the effective place of management. Under the Multilateral Instrument, the matter is determined by mutual agreement.

The state tax authorities are to consider the place of effective management, country of incorporation and other factors. This will include

• where the boards of directors meet,
• where the chief executive and similar senior officers carry out activities,
• where senior day-to-day management is undertaken,
• where headquarters are located
• the place of incorporation, and
• place where books and records are kept.

The test is similar to the central place of control and management at common law. It places greater emphasis on the day-to-day running of affairs.

Permanent Establishment

There are two types of permanent establishments, namely a fixed place of business and an agency. There must be a place of business which is widely defined.

A fixed place of business requires a degree of physical presence over time. The business must be carried on through the fixed place of business.

There are examples of places of business that are presumptively permanent establishments. There is a presumption that an office creates a permanent establishment. However, a shorter-term lease may rebut the presumption.

A building site or construction or installation project of a duration of more than one year is presumptively a fixed establishment.

Certain places identified in Double Taxation Agreements as potentially being permanent establishments are deemed not to be permanent establishments.

Employees & Agents PE

A person acting on behalf of another, habitually entering contracts or playing the principal role in its conclusion, will be deemed to have a permanent establishment in that country. An employee will be treated as an agent and may create a permanent establishment as an agent permanent establishment.

There is a broader definition under the Multilateral Instrument which Ireland did not opt to accept.

An independent agent does not create a permanent establishment. Where the agent acts exclusively or almost exclusively for one or more enterprises that are closely related, it will not be regarded as an independent agent.

The presence of the subsidiary does not of itself create a permanent establishment. It may be an agent in certain circumstances. Employees of the parent using the subsidiary’s office and engaging in business of the parent may constitute a permanent establishment.

Profits of Permanent Establishment

If there is a permanent establishment, the profits of the permanent establishment are apportioned to it. If not, the general rules apply.

Profits attributable to a permanent establishment are those which separate and independent enterprises might be expected to make if carrying on the same activities as those carried out by the permanent establishment. This requires attribution and allocation on a deemed basis.

One state taxes the profits of the permanent establishment, and the other state is to give a credit for that tax. The taxing authorities of the states are to agree on adjustments.

The Finance Act 2021 provides that the profits of an Irish branch of a non-resident company are to be calculated as a separate and independent enterprise, considering the functions, risks, and assets of the branch. All of the profits attributable to the permanent establishment are taxed in the country in which it is established. The other state is to make an adjustment to eliminate double taxation on these profits.

Corporate Dividends

Generally, double taxation agreements provide for zero or a lower rate of withholding tax on dividends, interest, and royalties. Legislation exempts withholding tax on interest and royalty payments made to double taxation residents in the ordinary course of business of the paying company.

Dividend withholding tax has its own stand-alone exemptions, and it is generally possible to pay dividends to a resident in the EU or a double taxation agreement state without withholding dividend withholding tax.

Dividends paid by a company resident in one state to a resident in the other state may be taxed in the other state. Dividends also may be taxed in the country where the paying company is resident. In the case of individual non-resident shareholders, this is limited to 15% (or 5% see below) of the gross amount of the dividend but may be different under the Treaty. The credit is given for tax paid in the company’s country of residence to the shareholder in his country of residence.

Dividends paid by a company which is a resident of a state may also be taxed in that state according to the laws of that state.

• If the beneficial owner of the dividend is a resident of the other state, the tax charge shall not exceed 5% of the gross amount of dividends if the beneficial owner is a company that holds directly at least 25% of the capital of the company paying the dividend throughout the 365-day period that includes the day of the dividend, and
• 15% of the gross amount of the dividend in all other cases.

Interest

Interest arising in a contracting state and paid to a resident of another state may be taxed in that other state. The interest arising in the contracting state may also be taxed in accordance with the laws of that state. If the beneficial owner of the interest is a resident of the other state, the tax charge shall not exceed 10% of the gross amount of the interest.

This does not apply if the beneficial owner of the interest, being a resident of a contracting state, carries on business in the other contracting state in which the interest arises through a permanent establishment in that state and the debt claim in respect of which interest is paid is effectively connected with such permanent establishment. In that case, the permanent establishment provisions apply.

Interest is deemed to arise in a contracting state if the person paying the interest, whether or not a resident of a contracting state, has in the contracting state a permanent establishment in connection with the indebtedness and such interest is borne by the permanent establishment.

Under the UK Double Taxation Agreement, all interest is to be taxed in the resident’s country of residence only. This applies to all interest.

A similar provision applies under the USA Double Taxation Agreement applicable to interest, but only that arising in either the USA or Ireland.

Interest

Interest payments, if interest is paid to a connected party, may be classified as a distribution. This may mean that it is treated as a distribution equivalent to a dividend, but it is not a deduction for tax purposes. Distribution treatment does not apply if the recipient of the interest is resident in an EU state or the United Kingdom, and an election is made under certain conditions satisfied so that the distribution treatment does not apply.

If the interest payment is not deemed a distribution, it may be a trading deduction incurred wholly and exclusively for the purpose of trade, a rental deduction, or a deduction as a charge.

Payments of interest may raise issues under transfer pricing rules and residence limitation rules.

Royalties

Royalties include any payment in kind considered for the use of a right to use any copyrighted literary, artistic, or scientific work, patent, trademark, secret formula, or process. Royalties arising in a contracting state and beneficially owned by a resident of the other state shall be taxable only in that other state.

This does not apply if the beneficial owner of the royalties carries on business in the other state in which the royalties arise through a permanent establishment and the right or property in respect of which royalties are paid is effectively connected with such permanent establishment.

Capital Gains Tax

The general principle is that capital gains are taxable in the country of residence. Capital gains attributable to the transfer of immovable property are taxable in the source country as well.

Disposal of shares deriving part of their value from immovable properties in the previous 365 days before the disposal are taxed in that jurisdiction (sitiate). Gains on disposals of other assets may only be taxed in the state of residence.

The Irish UK Double Taxation Agreement permits either Ireland or the UK to charge tax on individuals’ residence at any time during the three years before disposal. Accordingly, ordinary residents are subject to taxation.

Credit Given

The amount of the foreign tax credit cannot exceed the Irish charge on the same income. It is necessary to calculate the effective Irish rate of tax. This is the actual tax payable over total income. Total income means income from all sources after deducting charges, losses, and allowances, including gross foreign income.

The foreign effective rate of tax is the foreign tax payable over the gross income for foreign tax purposes from that source. The amount of foreign income chargeable to Irish tax is calculated by regrossing it at the lower of the two effective rates. Relief applies in respect of the person liable to tax.