Revenue Note for Guidance

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Revenue Note for Guidance

21B Tax treatment of certain dividends

Summary

This section provides that certain foreign dividends received by companies will be chargeable to tax at the 12.5% rate of corporation tax instead of at the 25% rate. Where dividends do not qualify to be charged at the 12.5% rate, they will continue to be charged at the 25% rate.

The dividends concerned are dividends received by a company out of the trading profits of a non-resident company that is resident, in an EU Member State, in a country with which Ireland has a double tax treaty in force, in a county with which Ireland has signed a double tax treaty which has yet to come into force, in a country which has ratified the Joint Council of Europe\OECD Convention on Mutual Assistance in Tax Matters or in a non-treaty country where the company is owned directly or indirectly by a quoted company.

The section provides that once a dividend is identified by the paying company as paid out of specified profits (which could be trading or non-trading), the rate of tax is determined by reference to the trading or non-trading nature of those specified profits.

Trading profits of non-resident companies will be allowed to pass up through tiers of companies by way of dividend payments so that, when ultimately paid to a company within the charge to corporation tax in the State, that company will be taxed on the dividends received by it at the 12.5% rate.

The section also provides a “safe harbour” that allows the full amount of a dividend received by a company to be charged at the 12.5% rate where two conditions are met, notwithstanding that a part of the dividend may not be paid out of trading profits:

  • The first condition is that 75% of the dividend paying company’s profits must be trading profits, either trading profits of that company or dividends received by it out of trading profits of lower tier companies that are resident in EU Member States, in countries with which Ireland has a double tax treaty in force or in countries with which Ireland had signed a double tax treaty which has yet to come into force or in a country which has ratified the Convention on Mutual Assistance in Tax Matters or in a non-treaty country where the company is owned directly or indirectly by a quoted company.
  • The second condition is an asset condition that must be satisfied on a consolidated basis by the company receiving the dividend and all companies that are its subsidiaries. The aggregate value at the end of the period concerned of the trading assets of those companies must not be less than 75% of the aggregate value of all of their assets.

A special rule also applies in the case of companies that are portfolio investors that receive a dividend from a company resident in an EU Member State, a country with which Ireland has a tax treaty in force, a country with which Ireland has signed a tax treaty which has yet to come into force, a country that has ratified the Convention on Mutual Assistance in Tax Matters or a non-treaty country where the company is owned directly or indirectly by a quoted company. A portfolio investor is an investor that holds no more than 5% of the dividend paying company. Such investors may treat a dividend received as being paid out of trading profits of the dividend paying company so as to be taxable at the 12.5% rate in Ireland.

The section exempts from corporation tax certain foreign dividends received by portfolio investors where the dividends form part of the trading income of the company.

Details

Definitions

(1)(a)Profits” of a company for a period is defined as the profits of the company according to its Profit and Loss Account, or it’s Income Statement, for the period. A Profit and Loss Account is likely to be relevant where the company’s accounts are prepared under local generally accepted accounting principles. Where a company uses International Financial Reporting Standards (IFRS) in the preparation of its accounts, the profits will appear in the Income Statement that, under IFRS, is the equivalent of the Profit and Loss Account.

Where a company is required to present a Profit and Loss Account or Income Statement to its shareholders at its AGM, the profits are to be taken as the profits according to that Profit and Loss Account or Income Statement.

A situation where the company is not required to present its Profit and Loss Account, or Income Statement at it’s AGM is provided for. In such a situation, the profits are to be taken as the profits according to the Profit and Loss Account, or Income Statement, prepared by the company based on an accounting framework that is recognised where the company is incorporated as presenting a fair view of the profits of the period concerned.

Relevant territory” is defined as an EU Member State, a country with which Ireland has a double tax treaty in force, a country with which Ireland has signed a double tax treaty which has yet to come into force or a country which has ratified the Convention on Mutual Assistance in Tax Matters (referred to in section 826(1C)). It includes the State. The inclusion of the State is relevant where a dividend is paid by an Irish company to its parent company in a Member State or a country with which Ireland has a tax treaty and is then paid on as a dividend to that company’s parent in the State.

Trading profits” are defined as the aggregate of two amounts.

The first amount is the proportion of the company’s profits that arise from trading. These are defined as so much of the profits of the company as are, on a just and reasonable basis, attributable to the carrying on of a trade by the company.

The second amount is so much of the profits of the company as are attributable to the amount of dividends received by the company that are treated under the section as being trading profits of the company. This will be an “after tax” amount. These are dividends received by the company out of trading profits of other companies in relevant territories.

The final words of the definition provide that trading profits do not include amounts attributable to the profits of an excepted trade under section 21A, or to dividends paid out of such profits. An excepted trade is a trade of dealing in or developing land, a trade of working minerals or a trade consisting of petroleum activities. The profits of such a trade are subject to tax at the 25% corporation tax rate. Dividends from such activities should also be subject to tax at that rate.

Interpretation rules

(1)(b)(i) References in the section to companies by which dividends are paid refer only to companies that are resident in relevant territories or companies the principal class of shares of which, or where the company is a 75% subsidiary of another company, that principal class of shares of that other company, are substantially and regularly traded on a stock exchange.

(1)(b)(ii) A dividend received by the company that is paid out of trading profits of another company will be treated as being received out of trading profits. The same will apply to a dividend that is paid out of income of a company that is treated under the section as trading profits. This covers income that consists of a dividend received by a company out of trading profits of another company and which is being paid on as a dividend to a third company.

(1)(b)(iii) The period out of the profits of which a dividend is to be treated as paid is set out. There are three scenarios:

  • (1)(b)(iii)(I) if the dividend is paid for a specified period, the dividend will be treated as paid out of the profits of that period,
  • (1)(b)(iii)(II) if the dividend is not paid for a specified period but out of specified profits, the dividend will be treated as being paid out of the period in which those profits arose,
  • (1)(b)(iii)(III) if the dividend is neither paid for a specified period, nor out of specified profits, the dividend will be treated as paid out of profits of the last period for which accounts of the company were made up that ended before the payment of the dividend.

(1)(b)(iv) Rules are provided for a situation where a dividend that is treated as paid for a particular period exceeds the distributable profits for that period. The rules provide that where, in the case of a period identified under paragraph (b)(iii) as the period for which a dividend is paid, the total dividend exceeds the profits available for distribution, the excess is to be treated as paid out of the profits of the company for the immediately preceding period (or so much of those profits as have not already been distributed, or treated as distributed). A dividend paid that exceeds distributable profits can be brought back through years in this way to determine the period that it is to be treated as paid for.

(1)(c) The provisions of sections 412 to 418 apply for the purposes of determining whether a company is a 75% subsidiary of another company.

Additional rules

(2)(a) This paragraph determines the appropriate proportion of a dividend that is treated as paid out of trading profits. Where the dividend is paid out of specified profits, the proportion of the dividend chargeable at 12.5% is a proportion of the dividend equal to the proportion of the trading profits included in the specified profits. Where the dividend is paid out of profits of a period (determined in accordance with subsection (1)(b)), the proportion of the dividend chargeable at 12.5% is a proportion of the dividend equal to the proportion the trading profits included in the period of the profits of which the dividend is paid are of the profits of the period.

(2)(b) In certain cases, a dividend paid by a company for a period can be treated as being paid out of trading income notwithstanding that some of it may come out of other income of the company, including non-trading income of the company and dividends received by it from companies that are not resident in a relevant territory. This will apply where two conditions are met. These are the profits condition and the assets condition.

(2)(b)(i) The profits condition requires that not less than 75% of the profits of the dividend paying company must consist of trading profits. It should be noted that this 75% test can be met by the company’s own profits from trading or by a combination of such profits and dividends, received by that company from companies resident in relevant territories out of trading profits of those companies, that are treated as trading profits of the dividend paying company.

(2)(b)(ii) The subparagraph provides a “safe harbour” provision. It applies to a dividend paid by a company resident in a relevant territory or in a non-treaty country where the company is owned directly or indirectly by a quoted company to a company that is within the charge to corporation tax in the State. Once the 75% income and asset tests are met, the dividends will qualify to be taxed at the 12.5% rate irrespective of the source of the dividends. The asset condition requires that 75% of the assets of the dividend-receiving company and all companies of which it is a parent (with a holding threshold of 5% applying for this purpose in accordance with section 626B) are trading assets. In calculating whether this condition is met no account is to be taken of assets of any of those companies that consist of shares held by it in another of those companies or loans made by one of those companies to another of those companies.

Applicability

(3) The circumstances in which the section applies are set out. It applies where a company receives a dividend chargeable to tax under Case III of Schedule D and the dividend is paid to it by another company out of its trading profits. A dividend is chargeable under Case III where it is received from a non-resident company. A dividend received from an Irish resident company is not chargeable under Case III but is regarded as franked investment income and is exempt from further tax in the hands of the receiving company.

Portfolio investors

(4) Special rules apply in the case of portfolio investors. Dividends from portfolio investments that are chargeable to tax under Case III are treated as paid out of trading profits and are taxable at 12.5%. Dividends from portfolio investments that would otherwise be included as trading receipts of a trade are given the same treatment as franked investment income and are exempt from corporation tax. A portfolio investor is an investor with a holding of less than 5% in the dividend–paying company.

Claims

(5) & (6) Where a company proves that the section applies and makes a claim in that behalf, section 21A(3) (which applies the 25% rate of corporation tax to certain income of companies – including in particular income of companies that is chargeable under Case III of Schedule D) is not to apply to dividends received by a company from another company out of trading income of the other company. A company must be able to demonstrate that they are entitled to the benefits of the section. If they can demonstrate this they will be entitled to take the benefits under self-assessment. In the event of an audit they may be required to prove that they meet the conditions of the section.

A claim under the section is to be included with a company’s annual return of profits for the accounting period concerned.

Relevant Date: Finance Act 2020