Double Tax Relief Persons

Table of Contents

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.

Tests are applied in the following order: Persons are deemed residents where

there is a permanent home available;
a permanent home available in both – centre of vital interests;
if centre of vital interests cannot be decided, where there is a permanent home in neither; where the person has a habitual abode;
if habitual abode cannot be decided, the state of which the person is a national;
if the person is a national of neither or both, then by mutual agreement.

Dividends & Interest

Dividends may be taxed in the country where the paying company is resident. In the case of individual shareholders, this is limited to 15% 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.

Interest arising in one country and paid to a resident of another may be taxed in both. 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.

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.

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.

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.