831 Implementation of Council Directive No. 90/435/EEC concerning the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States

Summary

This section implemented EU Council Directive 90/435/EC as amended by EU Council Directive 2003/123/EC on the common system of taxation applicable in the case of parent companies and their subsidiaries of different Member States (generally referred to as the Parent/Subsidiaries Directive). Since 2012 EU Council Directive 2011/96 (as amended) has replaced the implementing Directive as amended.

The Directives are concerned with relieving double taxation in the case of cross border dividend flows within the EU from a subsidiary to its parent company. Generally, the Directives seek to eliminate withholding tax and reduce double taxation of the profits out of which the dividends are paid either by exempting the dividends from tax in the hands of the parent company or allowing the parent company to reduce tax payable by it on the dividends by foreign tax borne by the subsidiary on the distributed profits.

Where the flow of profits is from a “subsidiary” to a “parent company” owning 5 per cent or more of the subsidiary’s share capital a number of reliefs, as set out below, apply to distributions of profit in respect of the shareholding of 5 per cent or more.

• No withholding tax is to be deducted from the distributions by the subsidiary’s country of residence.
• No withholding tax is to be deducted by the parent company’s country of residence.
• The parent company’s country of residence is either to —
  • exempt the parent company from corporation tax (or its equivalent) on the distributions from the subsidiary (the exemption method), or
  • allow credit for the “underlying” corporation tax or equivalent foreign tax suffered by the subsidiary on the profits out of which the distribution is made (the credit method). This is the method applied by Ireland.

By bilateral agreement Member States are permitted to substitute a voting rights criterion for the shareholding criterion for the determination of a parent-subsidiary relationship. They may also, by bilateral agreement, add the condition that the shareholding or voting rights relationship must be in existence for 2 years for a parent-subsidiary relationship to exist. These options have been exercised by Ireland.

Details

Definitions

(1)(a) “bilateral agreement”: the Directive provides at Article 3.2 for derogations from the 5 per cent shareholding requirement. These derogations are to be agreed bilaterally between Member States. While they would probably be agreed within a double taxation convention or by a protocol to such a convention the definition allows for any other form of intergovernmental agreement.

“company” and “company of a Member State”: these two definitions are related. The second definition’s sole function is to clarify the meaning of the phrase used in the definition of “company” but not elsewhere in the section. Irish companies which come within the scope of the Directive are set out in the Annex 1 to the Directive and are companies incorporated or existing under Irish law, bodies registered under the Industrial and Provident Societies Act, building societies incorporated under the Building Societies Acts, trustee savings banks within the meaning of the Trustee Savings Bank Act 1989.

“distribution” is given a wide meaning to include all flows of profits, other than genuine interest payments, between parent and subsidiary companies. The meaning of the term “distribution” is determined by reference to the taxation laws of the country of residence of the subsidiary.

“foreign tax” is a tax, other than an Irish tax, which is listed in the Directive as part of its definition of “company of a Member State”. The Directive mentions substitute taxes and these are also included in the definition of “foreign tax”.

“parent company”: this is taken from Article 3.1(a) of the Directive. It encompasses both a foreign subsidiary of an Irish parent company and an Irish subsidiary of a foreign parent company.

This also provides for the possibility that either one or both of the derogations allowed by Article 3.2 will be agreed between the Irish Government and the government of another Member State. It does this by referring to a bilateral agreement —

• providing for an additional 2 year continuous relationship requirement for there to be a parent-subsidiary relationship.
• providing for the 5 per cent shareholding requirement being replaced by a 5 per cent voting rights requirement. Alternatively, a 2 year continuous 5 per cent voting rights relationship may be required for there to be a parent-subsidiary relationship.

Where such provisions of a bilateral agreement exist they are to govern the application of the definition of “parent company” to companies covered by the bilateral agreement.

“the Directive” means Council Directive No. 2011/96/EU of 30 November 2011¹, as amended.

Construction

(1)(b) The concept of one company being a subsidiary of another is explained by reference to the term “parent company”. All references to “subsidiary” in the section are references to one company’s (the subsidiary’s) status in relation to another. If a company would be a “parent company” by reference to its interest in another company the other company is its subsidiary.

(1)(c) In order to ensure that this section accurately reflects the terms of the “Parent company-subsidiary” directive, words or expressions are in general given the same meaning as they have in the Directive.

Relief

(2) Credit for foreign tax on any distribution is to be set against Irish corporation tax on distributions received.

The foreign tax to be credited is any withholding tax charged by a Member State pursuant to a derogation duly given under Article 5 of the Directive.

Tax borne by lower tier subsidiaries can be offset against tax payable on a dividend received by an Irish parent company from its direct subsidiary. The shareholding requirement before such relief is available is that at each tier there must be a holding of at least 5 per cent. It should be noted that Schedule 24 contains a similar provision generally but two holding thresholds are involved. The first is a holding requirement at each tier. The second is an overall holding requirement by the parent company in each lower tier subsidiary. The minimum holding requirement in both cases is 5 per cent. However, as the second holding requirement does not apply under the Directive, it is disapplied for the purposes of section 831.

Distributions from foreign subsidiaries are exempt from the Irish withholding tax administered by Irish paying agents of foreign dividends in the unlikely event that they were received through an Irish paying agent.

In accordance with the Directive these reliefs do not apply to distributions on a winding up. In addition, the distributions must be chargeable to Irish corporation tax. If they were not, it would be inappropriate to give credit to the parent company for foreign tax.

(3) The foreign tax credited under subsection (2)(a)(ii) or (2A) is the tax suffered by the subsidiary on the part of its profits out of which the distribution is made. The provisions of Schedule 24 which set out rules for computing the foreign tax to be credited are adopted for the purposes of implementing the Directive.

Because the criterion for parent-subsidiary treatment in most Irish double taxation treaties differs from that set out in this section it could happen that an Irish parent company could be entitled to have a tax credit in respect of a dividend paid to it by another Member State while at the same time being allowed credit for foreign tax against its liability to Irish tax on the dividend. The tax credit paid to the parent company by the other Member State would be a refund of part of the corporation tax paid by the subsidiary on the profits out of which the dividend is paid. The credit under this section is restricted by the amount of any tax credit paid to the parent company by the other Member State.

(2) A parent company is not entitled to claim credit for foreign tax if it would be entitled to a credit for such tax under any other provision of the Irish tax code and double tax treaties.

Subsidiary treated as transparent entity

(2A) This concerns an unusual scenario where, say a company in one Member State (Member State B) is a subsidiary of a company in another Member State (Member State A) but Member State A regards the subsidiary as being transparent for tax purposes. In such circumstances, Member State A would tax the parent company on its share of profits as they arise (rather than waiting for a dividend to be received). If this situation arises, the Directive allows Member State A to continue to tax the profits as they arise but requires it to give credit to the parent company for an appropriate share of tax paid by the subsidiary and lower tiers of subsidiaries. This scenario was covered by the Directive because some of the companies covered by annex 1 are regarded as transparent in some Member States.

Where, by virtue of the legal characteristics of a subsidiary, the parent in Ireland is taxable on its share of the subsidiary as they arise (i.e. effectively treated as a partner), credit is to be allowed against the tax on these profits for an appropriate proportion of certain foreign tax specified in paragraphs (a) and (b) to the extent that such credit is not already given (for example, under a tax treaty). The foreign tax concerned is:

• any foreign tax borne by the subsidiary,
• tax borne by lower tiers of subsidiaries that is treated under paragraph 9B of Schedule 24 as borne by the immediate subsidiary. (Schedule 24 makes such a provision generally but subject to two holding thresholds, one at each tier and the other an overall holding requirement by the parent in the ultimate subsidiary. The overall holding requirement does not apply for the purposes of subsection (2A)).

(4) The section applies without prejudice to double taxation agreements so that the reliefs available under such agreements and the provisions in agreements for exchange of information are unaffected by the section.

Dividend Withholding Tax

(5) Dividend withholding tax (DWT) under Chapter 8A of Part 6 does not apply to a distribution made by an Irish resident subsidiary company to its parent company resident in another Member State. However, the subsidiary company is required to furnish to Revenue details of the distribution in accordance with section 172K.

(6) The non-application of DWT does not have effect, however, if the majority of the voting rights in the parent company are controlled by persons who are resident outside of tax treaty countries or EU Member States unless it can be shown that the parent company exists for genuine commercial reasons and is not part of a tax avoidance scheme, including a scheme to avoid DWT.

Finance Act 2015 Amendment

(7)(a) Section 34 Finance Act 2015 introduced a new subsection (7) which has effect in respect of distributions made or received on or after the passing of Finance Act 2015. Subsection 7 transposes Council Directive No. 2015/121/EU which amended the PSD to include a common minimum anti-avoidance rule across EU States. This rule means that the benefits of the section will not be granted to an arrangement or series of arrangements which has been put in place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the purpose of the Directive and is not genuine having regard to all the facts and circumstances.

(7)(b) An arrangement shall be regarded as not genuine to the extent that it is not put in place for valid commercial reasons which reflect economic reality.

(7)(c) An arrangement may comprise of more than one step.

Relevant Date: Finance Act 2021