835R Controlled foreign company charge

Summary

This section sets out the charging provisions and provides that a CFC charge will arise on the undistributed income of a CFC where that CFC has non-genuine arrangements that have been put in place for the essential purpose of securing a tax advantage.

To identify whether an arrangement is non-genuine, an analysis is required of the extent to which the CFC would own the assets or assume the risks that it does were it not for the controlling company in the State undertaking the SPFs relevant to those assets and risks and it would be reasonable to consider that the SPFs are instrumental in generating the income.

The charge arises on the amount of undistributed income that can be attributed to the Irish SPFs carried on the State by a chargeable company in relation to the CFC. Irish SPFs are referred to as “relevant Irish activities” and the arm’s length principle is applied in assigning a value to the undistributed income attributable to the Irish SPFs.

The undistributed income amount cannot exceed a proportion of undistributed income that corresponds to the controlling company’’s shareholding. The section is worded so as to ensure a CFC charge can still arise in instances where a CFC group has transferred the SPF activity out from the controlling company to another connected company and which would mean, that in the absence of this provision, the CFC charge could be avoided.

Where it is reasonable to consider that the arrangements that have given rise to the undistributed income would have been entered into by companies dealing with each other at arm’’s length then that undistributed income shall be excluded from any further charge. Undistributed income that has previously been assessed to an Irish CFC charge shall be excluded also.

The rate of tax to be applied to the CFC charge is the rate that would have applied had the income been earned in the chargeable company. Apart from creditable tax, calculated in accordance with section 835Q, no other relief, deduction or set-off shall be allowed against a CFC charge.

An asset or risk is excluded from the relevant assets and risks if the CFC’’s undistributed income is only negligibly higher than it would have been if the CFC had not held the asset or borne the risk at all. This exclusion applies only as far as all the assets or risks excluded, when taken together, increase the CFC’’s profits by only a negligible amount.

A charge will not arise where it is reasonable to consider that the essential purpose of the arrangement was not to secure a tax advantage or if the CFC does not have any non-genuine arrangements (i.e. there are no Irish SPFs) in place.

Details

‘(1) ‘Participation’’ means:

• a direct or indirect possession of, or beneficial right to, or right to acquire share capital,
• a direct or indirect right to exercise or acquire rights to exercise the voting power of a company,
• a beneficial right to any profits available for distribution to equity holders of a company.

(2) Subject to other subsections of section 835R, where a CFC group has undistributed income and the CFC group carries on Irish SPFs through a chargeable company, the CFC charge shall arise on the chargeable company in the accounting period of the chargeable company within which the accounting period of the CFC ends.

(3) The CFC charge will arise on the undistributed income of the CFC group to the extent that it can be attributed to Irish SPFs.

(4) The arm’’s length principle is applied in assigning a value to the undistributed income attributable to Irish SPFs. The undistributed income is limited to an amount proportionate to the controlling and chargeable companies’ shareholdings in the CFC through a formula as follows:

• UI x AP, where,
• UI represents the undistributed income of the CFC, and
• AP is the aggregate of the controlling and chargeable companies’’ participation in the CFC expressed as a percentage of the total participation in the CFC.

(5) The CFC charge is prevented from arising on undistributed income attributable to Irish SPFs, if the income arises out of arrangements where it is reasonable to consider that:

• the arrangements would have been entered into by parties dealing with each other at arm’’s length; or
• the essential purpose of the arrangements is not to secure a tax advantage; or
• the arrangements are subject to the transfer pricing provisions under section 835C.

A CFC charge will not apply where the undistributed income has previously been subject to a CFC charge.

(6) The rate of tax to be applied to the CFC charge is the rate that would have applied had the income been earned in the chargeable company.

(7) The corporation tax chargeable is reduced by any creditable tax that arises under section 835S.

(8) The CFC charge is ring-fenced so that the corporation tax chargeable may not be reduced by any relief, deduction or set-off except for creditable tax arising under section 835S.

(9) An asset or risk, whether taken on an individual basis or taken together, is excluded from the relevant assets and risks if the CFC’’s undistributed income is only negligibly higher than it would have been if the CFC had not held the asset at all, or, had not borne the risk at all.

(10) The charging section will not apply where,

• it is reasonable to consider that the CFC did not at any time hold assets or bear risks under an arrangement, the essential purpose of which was to secure a tax advantage, or,
• where the CFC does not have any non-genuine arrangements (i.e. there are no Irish SPFs) in place.

(11) Whether an arrangement should be considered non-genuine requires an analysis to the extent to which,

• the CFC would not own the assets or bear the risks which generate the undistributed income but for the Irish SPFs (‘‘relevant Irish activities’’) and,
• it is reasonable to consider that the Irish SPFs are instrumental in generating that income.

Relevant Date: Finance Act 2021