Revenue E-Brief Issue 09/2015, 29 January 2015
The purpose of this eBrief is to clarify Finance Act changes made in 2013 to the calculation of foreign tax credits in respect of certain foreign dividends received by Irish companies. Following the findings of the Court of Justice of the European Union in the Test Claimants in the FII Group Litigation, the calculation of double taxation relief for foreign tax suffered on dividend income was enhanced in Finance Act 2013, to allow for an additional foreign tax credit in certain circumstances. Amendments were made refining the relief in Finance Act (No.2) 2013, as some restrictions had emerged from the operation of the legislation in practice.
Section 26 Finance Act 2013 inserted paragraph 9I, into Schedule 24 Taxes Consolidation Act, 1997, to provide for an additional credit for tax on foreign dividends. The credit is applicable to certain dividends paid directly out of the profits of companies resident in EU/EEA treaty-partner countries. Credit is also available for tax paid in third country jurisdictions, if those profits are paid to Ireland via an EU/EEA treaty-partner resident company. The computation of the additional tax credit is based on the nominal rate of foreign tax which applies in the paying company’s jurisdiction, rather than the effective rate of tax to which the profits, out of which the dividend is actually paid, are liable. The total credit, including the additional credit, cannot exceed the corporation tax attributable to the income. The additional credit is not eligible for pooling of credits or for carry forward of relief.
Section 40 Finance Act (No. 2) 2013 amended paragraph 9I, with the introduction of a new subparagraph (4A), to provide for an additional foreign tax credit in situations where the dividend received by the Irish company derives from untaxed profits of a paying company and is attributable, indirectly through other dividend paying companies, to profits that have suffered foreign tax. In such situations the additional foreign credit is to be calculated by reference to the nominal rate of tax applicable to the profits of the company that have been subject to tax.
Queries have arisen regarding what is the nominal rate of tax to be used where the dividend has been paid through an intermediate company that has benefitted from an exemption on the income out of which the dividend has been paid. Exemptions may arise from domestic franked investment income regimes or from the operation of an exemption method of relief from double taxation.
In such situations, the rate per cent of tax which is to be used in the formulae is the rate per cent applicable to the profits that have been subject to tax. In order to determine the applicable rate per cent of foreign tax, it is necessary to trace back to the source of the profits and identify the actual rate per cent of tax that the profits that were distributed through one or more intermediary companies have been charged. Where the dividend paid to the Irish company is derived from various incomes of the paying company, including its own earned profits that have been subject to tax as well as dividends received from one or more sources, then for the purposes of calculating the additional foreign credit the dividend is disaggregated into its component parts which are treated as separate dividends. The appropriate rate per cent of tax applicable to the profits that have been subject to tax for each of these separate dividends is to be used in the formulae.
It should be noted that certain jurisdictions operate dividend "participation exemption" regimes that involve 95%, or most, of the foreign dividends concerned being exempt from tax. The definition of “tax” in the legislation ensures that such exemption of foreign dividends concerned will not give rise to an entitlement to an additional foreign tax credit based on the full value of the dividend at the nominal rate applicable in the paying company’s jurisdiction.
Where profits of the paying company are fully relieved from tax due to group relief, the rate per cent of tax for the purposes of the formulae in subparagraph (4) is the nominal rate of tax in the paying company’s tax jurisdiction that corresponds to corporation tax in the State. Such profits can be regarded as having been “subject to tax” for the purposes of the calculation of the additional foreign credit formulae in paragraph 9I. Where a jurisdiction has more than one rate of corporation tax the standard rate of corporation tax of the jurisdiction is to be used.
The changes introduced by section 26 Finance Act 2013 apply to foreign dividends paid on or after 1 January 2013. In practice, Revenue will apply the provisions of subparagraph (4A) of paragraph 9I of Schedule 24, introduced by section 40 Finance Act (No.2) 2013, as respects foreign dividends paid on or after 1 January 2013 (the date from which the additional foreign credit is applicable). Further details are contained in Part 2.2.1 of the Income Tax, Capital Gains Tax and Corporation Tax Manual.
29 January 2015