Irish Tax Law Change Affects Tax Planning by Multinationals

Published: Oct 23, 2014
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A shake-up in multinational tax and supply-chain planning may be headed our way, as Ireland’s government has just announced that it will phase out the once-famous “double-Irish” structures that have been a principal feature of some companies’ European tax planning.

In recent years, Ireland has had one of the more favorable variants of a “territorial” tax system, allowing Irish legal entities not managed or controlled in Ireland not to have taxable residency there. Such exemption from tax for some Irish-chartered entities, managed and controlled outside of Ireland, generally tended to limit Irish income taxation to in-country activities. Ireland’s territorial tax system allowed other countries’ multinational enterprises not to be subject to Irish income taxation in respect of supply-chain activities and intellectual property located in other countries.

Such territorial tax system actually encouraged U.S.-based and other multinational enterprises to locate substantial operating subsidiaries and activities in Ireland, thereby benefitting from the country’s 12.5% corporate tax rate for active business income. Moreover, the availability of double-Irish legal-entity structures helped U.S.-based multinationals manage the sometimes over-inclusive reach of the U.S. subpart F rules for taxing certain income of controlled foreign corporations (CFCs) held by U.S. shareholders.

The Irish government has announced that it will require newly chartered entities in Ireland to be tax-resident there, effective January 1, 2015. For existing companies, there is a proposed transition period until the end of 2020. Considering the recent pace of proposals to clamp down on international tax policy, it remains to be seen whether the Irish government’s proposed transition period will be shortened. Thus, it will be important for multinationals with connections to Ireland to review their current structures to evaluate the impact of proposed changes in Irish tax law.

Nevertheless, any transition of supply-chain planning away from Ireland may be gradual, since the country’s tax system shares many other features of well-known holding company jurisdictions, including an absence of CFC and thin-cap rules, extensive exemptions from withholding tax on interest and dividend payments, foreign tax credits, and an extensive network of tax treaties.

The proposed change in Irish tax law is in response to widespread criticism of perceived aggressive tax planning by multinationals. Other countries recently have proposed changing their tax rules to prevent or limit the use of structures in their countries similar to the double-Irish structure.

Going forward, some multinationals may want to consider different approaches to designing their supply chains and redeploying their intellectual property to avoid cross-border tax inefficiencies.

Trends & Developments - October 2014