Revenue Note for Guidance

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Revenue Note for Guidance

PART 35B

CONTROLLED FOREIGN COMPANIES

Overview

Section 27 inserts a new Part; Part 35B, into the Taxes Consolidation Act 1997 (TCA). The new Part implements the Articles 7 and 8 of the EU Anti-Tax Avoidance Directive (ATAD) provisions on controlled foreign companies.

The Controlled Foreign Company (‘‘CFC’’) rules, required to be introduced by the ATAD, are an anti-abuse measure, designed to prevent the artificial diversion of profits from controlling companies to offshore entities in low or no-tax jurisdictions (the CFCs).

The rules operate by attributing undistributed income of the CFCs, arising from non-genuine arrangements put in place for the essential purpose of avoiding tax, to the controlling company, or a connected company in Ireland, for taxation, where the controlling company or the connected company have been carrying out ‘‘significant people functions’’ (‘‘SPFs’’) in Ireland. The rules require an analysis as to the extent to which the CFC would hold the assets or bear the risks that it does were it not for the controlling company undertaking the SPFs in relation to those assets and risks. A company is considered to have control of a subsidiary where (in broad terms) it has direct or indirect ownership of or entitlement to more than 50% of the share capital, voting power or distributions.

A number of exemptions are provided including exemptions for CFCs with low accounting profits or a low profit margin or where the CFC pays a comparatively higher amount of tax in its territory than it would have paid in the State. A one-year grace period is also allowed in respect of newly-acquired CFCs where certain conditions apply. The CFC rules will not apply where the arrangements under which SPFs are performed have been entered into on an arm’’s length basis or are subject to Ireland’s Transfer Pricing regime under Part 35A.

In order to prevent double taxation, a credit will be available for any tax paid by the CFC on the same income which is subject to the CFC charge in Ireland, arising in its jurisdiction or any other jurisdiction (including Ireland) on the chargeable income.

The rules take effect from 1 January 2019.

CHAPTER 1

Interpretation

Overview

Chapter 1 provides the interpretation section and sets out the meaning of concepts used in this Part.

835I Interpretation

Summary

This section is the interpretation section for the Part. Most of the definitions are self-explanatory and others are defined by reference to the 2010 Report on the Attribution of Profits to Permanent Establishments of the Organisation for Economic Co-operation and Development dated 22 July 2010.

Details

(1) “accounting profit” in relation to a CFC), means the amount of profit, before taxation, shown in the profit and loss account. Capital gains/losses or dividends/other distributions which would not be within the charge to tax in determining the CFC’s corresponding chargeable profits in the State are excluded.

“amount of foreign tax” means the aggregate of any tax paid or borne (for example, withholding taxes) by a CFC in respect of its profits for the accounting period and can include tax paid or borne in the State.

“arrangement” means:

  • any transaction, action, course of action, course of conduct, scheme, plan or proposal,
  • any agreement, arrangement, understanding, promise or undertaking whether express or implied and whether or not enforceable or intended to be enforceable by legal proceedings, and
  • any series of or combination of the circumstances described above.

This definition has broad applicability and includes arrangements entered into by one or two or more persons, whether acting in concert or not, whether or not entered into or arranged wholly or partly outside the State or whether or not entered into or arranged as part of a larger arrangement or in conjunction with other arrangements. Arrangements entered into in accordance with section 826 of the TCA “Agreements for relief from double taxation” are excluded.

“chargeable company” means a controlling company, or a company connected with the controlling company, which performs relevant Irish activities either itself or through a branch or agency, on behalf of a CFC group.

“chargeable income” means the CFC’s undistributed income of a CFC which is subject to a CFC charge.

“company” means any body corporate or unincorporated association.

“connected” is construed in accordance with section 10 of the TCA.

“controlled foreign company” means a company which is not resident in the State and is controlled by a company/companies resident in the State.

“controlled foreign company charge” is a charge imposed under section 835R(2) of this Part.

“controlled foreign company group” means all the CFCs of a controlling company.

“controlling company” is a company resident in the State that controls a CFC.

“corresponding chargeable profits in the State” means the profits or gains of a CFC which would be its equivalent profits or gains for Irish corporation or capital gains tax purposes, provided certain assumptions set out in section 835O were applied, for the accounting period.

“corresponding corporation tax in the State” means the corporation tax and capital gains tax that would be chargeable, in the State, on the CFC’s corresponding chargeable profits in accordance with section 835P by applying the assumptions set out in section 835O.

“creditable tax” has the meaning given to it by section 835S.

“EEA Agreement” means the Agreement on the EEA signed on 2 May 1992 and 17 March 1993.

“foreign chargeable profits” means the profits of a CFC, determined for tax purposes under the laws of the CFC’’s territory of residence or where the laws of the CFC’’s territory of residence do not require profits to be determined for tax purposes, the CFC’’s profits determined in accordance with the generally accepted accounting practice that applies in the territory where the CFC is resident.

“foreign company charge” means a charge similar to the CFC charge but that arises under the laws of a territory other than the State.

“key entrepreneurial risk-taking function” is to be construed in a manner that is consistent with the use of that term in the OECD Report.

“non-trading income” means the income of a CFC, other than trading income, included in the CFC’s corresponding chargeable profits in the State.

“OECD Report” means the 2010 Report on the Attribution of Profits to Permanent Establishments of the Organisation for Economic Co-operation and Development dated 22 July 2010.

“profit and loss account” means the profit and loss account, income statement or other equivalent, prepared in accordance with international accounting standards or with generally accepted accounting practice. If the accounts are not prepared in accordance with these standards or no accounts are prepared, it is the accounts that would be prepared in accordance with generally accepted accounting practice.

“relevant assets and risks” means the assets which a CFC has or has had, and the risks which a CFC bears or has borne, where those assets or risks would not have been employed or undertaken but for the SPFs performed in the State.

“relevant function” means an SPF or a key entrepreneurial risk-taking function.

“relevant Irish activities” means relevant functions performed in the State on behalf of a CFC group. Such functions must be relevant to the legal and beneficial ownership of the assets in the CFC group or the assumption and management of the risks of the CFC group.

“relevant Member State” means a state, other than the State, which is a Member of the European Union or a state which is a contracting party to the EEA Agreement.

“significant people function” (‘‘SPF’’) is to be construed in a manner consistent with the use of that term in the OECD Report.

“tax advantage” means

  • a reduction, avoidance or deferral of any charge or assessment to tax, including any potential or prospective charge or assessment, or
  • a refund of or a payment of an amount of tax, or an increase in an amount of tax, refundable or otherwise payable to a person including any potential or prospective amount so refundable or payable,

arising out of or by reason of an arrangement. This includes an arrangement where another arrangement would not have been undertaken or arranged to achieve the results or any part of the results, achieved or intended to be achieved by the arrangement.

“undistributed income” has the meaning given to it by section 835Q.

(2) A company shall be treated as an “associated company” of another company where

  • one of them directly or indirectly is entitled to acquire not less than 25 per cent of the share capital or issued share capital, or voting power of the other company,
  • one of them is beneficially entitled to not less than 25 per cent of any profits available for distribution to equity holders of the other company, or
  • in respect of those companies, a third person directly or indirectly is entitled to acquire not less than 25 per cent of the share capital or issued share capital, or voting power or is beneficially entitled to not less than 25 per cent of any profits available for distribution to equity holders of each company.

Relevant Date: Finance Act 2021