Revenue Note for Guidance

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Revenue Note for Guidance

23A Company residence

Summary

This section contains rules concerning the tax residence of companies which are incorporated in the State. These rules were fundamentally revised in Finance Act 2014. Section 43 of Finance Act 2014 substituted a new section for section 23A to provide that an Irish incorporated company will be regarded as resident for tax purposes in the State. The alignment of company residence with the treatment of company residence that is provided for in double taxation treaties is continued. Where for the purposes of a double taxation treaty, a company is regarded as resident in the treaty country and not resident in the State, the company shall be regarded as not resident in the State for tax purposes.

The new incorporation rule for determining the tax residence of a company incorporated in the State will apply to companies incorporated on or after 1 January 2015. For companies incorporated in the State before this date, a transition period will apply until 31 December 2020 and section 23A as it was before the 2014 Finance Act amendment will continue to apply (see Company Residence Rules for companies incorporated before 1 January 2015: Pre Finance Act 2014 provisions below). Where, in the case of a company incorporated in the State before 1 January 2015, there is both a change in ownership and a major change in the nature and conduct of the business of the company in the relevant period (as defined in section 43(2) of Finance Act 2014), the company will become resident in the State from the date of the change in ownership and the provisions of the new section 23A will apply from that date.

The new section 23A also clarifies that the application of the general common law rule of company residence to companies that are not incorporated in the State remains unaffected. Accordingly, a company that is incorporated in a foreign jurisdiction but that is centrally managed and controlled in the State will continue to be treated as resident in the State for tax purposes.

The following is a brief summary of the new rules on company residence:

General Rule

(1) A company that is incorporated in the State will be regarded as resident for tax purposes in the State.

Companies regarded for the purposes of a tax treaty as resident in a territory other than the State

(2) Incorporation in the State does not result in a company being tax resident in the State if the company is regarded as resident in a territory other than the State and not resident in the State for the purposes of a tax treaty. In such a case, the tax treaty provisions override the general rule.

Companies that are not incorporated in the State

(3) A company that is incorporated in a foreign jurisdiction and is centrally managed and controlled in the State will be resident in the State for tax purposes.

Transition period for companies incorporated before 1 January 2015

Section 23A as substituted by Finance Act 2014 has effect from 1 January 2015. However, with regard to companies incorporated before 1 January 2015, the substituted section has effect:

  1. after 31 December 2020, or
  2. from the date, after 31 December 2014, of a change in ownership of the company where there is a major change in the nature or conduct of the business of the company within the relevant period,

whichever is the earlier.

“relevant period” as referred to in (ii) above, means a period beginning on the later of 1 January 2015 or the date which occurs one year before the date of the change in ownership of the company and ending 5 years after the date of that change in ownership.

Accordingly, for companies incorporated before 1 January 2015, the new residence rules in section 23A as substituted by Finance Act 2014, will apply after 31 December 2020, unless there is both a change of ownership of the company and a change in the nature or conduct of the business within the relevant period, in which case the new residence rules will apply from the date of the change of ownership. Where there is an on-going business in the company (i.e. with no major change), the transitional period to the end of 2020 will continue to apply even if ownership changes before that time.

For the purposes of the references to a change in ownership, Schedule 9 (other than paragraph 4) of the Taxes Consolidation Act 1997 (TCA) will apply as if references in Schedule 9 to sections 401 or 679(4) of the TCA were references to the commencement provisions in Finance Act 2014, section 43(2)(b) and (c). This means that there will be a change in the ownership of a company if –

  • A single person acquires more than 50% of the ordinary share capital of the company,
  • 2 or more persons each acquire a holding of 5% or more or the ordinary share capital of the company and those holdings together amount to more than 50% of the ordinary share capital of the company, or
  • 2 or more persons each acquire a holding of the ordinary share capital of the company, and the holdings together amount to more than 50% of the ordinary share capital of the company, but disregarding a holding of less than 5% unless it is an addition to an existing holding and the 2 holdings together amount to 5% or more of the ordinary share capital of the company.

Paragraph 4 of Schedule 9 states that a transaction or circumstance taking place before the change in ownership shall not be taken into account in determining whether there is any subsequent change in ownership. This paragraph will not apply for the purposes of references to a change in ownership of a company, so that such a transaction or circumstance can be taken into account.

“a major change in the nature or conduct of the business of a company” means –

  1. a major change in the nature or conduct of a trade, within the meaning of section 401(1)(a) or (b), carried on by the company. This includes:
    • a major change in the type of property dealt in, or services or facilities provided, in the trade, or
    • a major change in customers, outlets or markets of the trade.
  2. the commencement by the company of a new trade, or
  3. a major change arising from the acquisition by the company of property or of an interest in, or right over, property.

In relation to (iii) above, a major change in the business of the company could arise if there was a major change in the type or range of assets held by the company. For example, if a company holding assets such as a deposit account or shares were to acquire intangible assets for licensing to other companies, this could constitute a major change in the business of the company.

Company residence rules for companies incorporated before 1 January 2015: Pre Finance Act 2014 provisions.

Prior to Finance Act 2014, the general rule for determining company residence was the common law rule by virtue of which a company is resident in the State for tax purposes if the central management and control of the company is in the State. This rule applied prior to the Finance Act 2014 changes and continues to apply to companies that are incorporated in other jurisdictions. Statutory anti-abuse provisions supplementing this general rule were included in the ‘old’ section 23A that was applicable before the change in Finance Act 2014.

This section provided that in certain specific circumstances a company would, by virtue of being incorporated in the State, be regarded as resident in the State for tax purposes. Broadly, section 23A provided that where a company is incorporated in Ireland and neither it, nor any company related to it, carries on a trade in Ireland, the company would be regarded as resident in the State for tax purposes, unless it would be treated as not being so resident for the purposes of a double taxation treaty.

This specific incorporation rule did not apply where the company is a ‘relevant company’ that carries on a trade in the State or is related to a company that carries on a trade in the State. A ’relevant company’ is a company that either:

  • is ultimately controlled by persons resident in the EU (including Ireland) or in a country with which Ireland has concluded a double taxation treaty, or
  • is, or is related to, a company the principal class of the shares of which is substantially and regularly traded on one, or more than one, recognised stock exchange in an EU Member State or in a tax treaty country.

The ‘old’ Section 23A provided that a company which is regarded, for the purposes of a tax treaty, as resident in a territory other than the State and not resident in the State, was to be treated as not resident in the State for tax purposes.

The ‘old’ Section 23A also provided that where by reason of a mismatch of residence rules with a treaty-partner country, an Irish-incorporated company would neither be resident in that country nor in in the State and, accordingly, would not otherwise be resident in any country, the company will be treated as resident in the State. This provision was introduced in section 39 of Finance (No. 2) Act 2013 and addressed a mismatch situation where an Irish-incorporated company that is managed and controlled in a treaty-partner country is not regarded as resident for tax purposes in any territory because (i) the company is not resident in the treaty-partner country, as it is not incorporated in that country, and (ii) the company is not resident in the State, as it is not managed and controlled in the State.

Details

The detailed provisions of the ‘old’ section 23A (i.e. before the change in Finance Act 2014) are set out hereunder.

Definitions

(1)(a) “arrangements” refers to tax treaties between the Government and the authorities of another territory.

“relevant company” is a company —

  • which is under the ultimate control of persons resident in an EU Member State or a country with which Ireland has a tax treaty, or
  • which is, or is related to, a company the principal class of shares of which are substantially and regularly traded on a recognised stock exchange in an EU Member State or a country with which Ireland has a tax treaty.

“relevant territory” is either an EU Member State (including Ireland) or a country with which Ireland has a tax treaty.

“tax” means (in the context of a person being resident in a territory other than the State for the purposes of “tax”) tax which corresponds to Irish income tax or corporation tax.

(1)(b)(i) A company is regarded as related to another company if one is a 50 per cent subsidiary of the other or both are 50 per cent subsidiaries of a third company. A company is regarded as a 50 per cent subsidiary of another company if and so long as at least 50 per cent of its ordinary share capital is owned directly or indirectly by that other company. Section 9 rules are applied to clarify the links to direct, indirect and beneficial ownership. Sections 412 to 418 are applied to ensure that companies have a real relationship and not just one which can be manipulated by the issue of shares. These sections require that the company which holds the required number of shares must also be entitled to the same proportion of dividends, and assets on a winding up, of the company in which the shares are held.

(1)(b)(ii) In considering whether a company is a relevant company, “control” is construed in accordance with section 432. Under that section a person has control of a company if the person has, or is entitled to acquire —

  • the majority of the issued share capital or voting power in the company,
  • such rights as would entitle the person to more than 50 per cent of distributions made by the company, or
  • such rights as would entitle the person to more than 50 per cent of assets of the company on its winding up.

Also under that section, rights of a person and the person’s associates can be aggregated to determine whether a company is controlled by “five or fewer participators”. In adapting that section for the purposes of this section, the expression “five or fewer participators” is replaced by —

  • “persons who are resident in a relevant territory” when considering whether a company is controlled by residents of a relevant territory, and
  • “persons who are not resident in a relevant territory” when considering whether a company is controlled by persons who are not resident in a relevant territory.

General rule

(2) The general rule by virtue of which a company is resident in the State for tax purposes if the central management and control of the company is in the State, is supplemented by an incorporation rule so that a company which is incorporated in the State is regarded as resident in the State for corporation tax and capital gains tax purposes. Consequently, such a company is taxable in the State on its worldwide income and gains. The existing general rule that a company which is managed and controlled in the State is resident in the State continued to apply alongside the supplementary provisions of the ‘old’ section 23A.

Exceptions

(3) Incorporation in the State does not in itself result in a company being tax resident in the State if the company is a relevant company and either the company itself or a related company carries on a trade in the State.

(4) In addition, incorporation in the State does not result in a company being tax resident in the State if the company is treated under a tax treaty as resident in a territory other than the State and as not being resident in the State. In such a case, the tax treaty provisions override the general rule.

(5) Notwithstanding subsection (3), where an Irish incorporated company that is managed and controlled in a treaty partner country would not otherwise be regarded as resident for tax purposes in any territory for the reason that —

  • the company would not be resident for tax purposes in the treaty partner country because it is not incorporated in that country, and
  • the company would not be resident in the State for tax purposes because it is not managed and controlled in the State,

then the company will be regarded as resident in the State for tax purposes.

Subsection (5) applies from 24 October 2013 for companies incorporated on or after that date and from 1 January 2015 for companies incorporated before 24 October 2013.

Relevant Date: Finance Act 2021