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3.1. Corporate Tax Residence

In the past, long-standing case law held that a company was deemed to be resident in Ireland if it was “managed and controlled” therein. Management and control refers to the place where the board of directors takes the key decisions affecting the business and the company’s affairs. This practice allowed the development of  “Double Irish” structures which leveraged Irish law to channel royalty payments for intellectual property from one Irish-registered subsidiary to another that is deemed to be resident outside Ireland for tax purposes, and thus to tax-friendly locations. The working of double Irish structures is described below.

Following international pressure brought about by perceived abuse of the Irish rules, the law has now been amended with the effect that companies registered in Ireland on or after 1 January 2015 are considered resident in Ireland for tax purposes, and existing companies registered in Ireland prior to that date will be considered tax resident in Ireland from 1 January 2021, or from the date of a change in ownership or if there is a major change in the nature or conduct of the business of the company. The rule may be overridden by provisions of an applicable double taxation agreement, in which case an Irish incorporated company is regarded as tax resident in another territory and will not be regarded as Irish tax resident.

Companies that are tax resident in Ireland are liable to tax on their worldwide income with credit given for foreign taxes paid on income earned abroad. Companies that are not tax resident in Ireland and which do not carry on a trade in Ireland have no liability to Irish corporation tax and have no obligation to file an Irish corporation tax return or to identify the country in which they are resident for tax purposes.

Relevance of the Residence Concept to International Tax Structuring through Ireland

As seen above, a company is deemed to be an Irish resident if it is incorporated in Ireland, or if it is managed and controlled from Ireland. Nevertheless, a company incorporated in Ireland (and which ordinarily would be regarded as a resident and subject to Irish corporate tax on its worldwide income), will nonetheless be deemed a non-resident of Ireland (and will thus be outside the ambit of Irish corporate tax), where:

  • either the company or a related company is carrying on a trade in Ireland; and either
    • the company is ultimately controlled in a tax treaty country or in an EU Member State; or
    • the company or a related company is quoted on a recognized stock exchange in the EU or in a tax treaty country; or
    • the company is treated under a tax treaty as not resident in Ireland.

The tests upon which the exception is based are understood as follows:

Trading Exception

Under the trading exception, a company can be incorporated in Ireland, but not treated as a resident as long as the following conditions are met:

  • Its management and control is not exercised in Ireland
  • It, or an affiliate, carries on an active trade in Ireland. A qualifying affiliate includes:
    • Where 50% or more of the shares of one are held by the other, or 50% or more of the shares of both are held by a third party
    • The company is entitled to at least 50% of the profits distributed by the other
    • The company is entitles to at least 50% of the assets of the other if the other is wound up
  • It, or a 50% or more affiliate or parent company must be listed on one or more recognized stock exchange(s) in an EU Member State or jurisdiction with which Ireland has a DTA. If the listing condition is not met, the company may still have residency exception if it is 50% or more controlled by a resident in a tax treaty jurisdiction.

The company must also be controlled by persons resident in a double tax treaty partner country, or be a subsidiary of an entity which is listed on a recognized stock exchange in such a country.

Treaty Exception

Under the treaty exception, a company normally considered resident due to being incorporated in Ireland will instead be considered a resident of the treaty partner jurisdiction as per relevant provisions of the double taxation agreement with that jurisdiction. Most Irish tax treaties contain a tie-breaker rule which, in case of dual residence, would attribute residence to the Contracting State where the place of effective management is located.

Use of the Exception in International Tax Planning

Ireland has become home to many multinationals, in particular in the IT and pharmaceutical sectors. Whilst Ireland’s comparatively low headline corporate tax rate for trading income may in itself explain part of the success, the Irish registered but not resident approach is key to the operation of the international tax structures using Ireland. Indeed, a foreign company X would incorporate two Irish companies Y and Z. Whilst Z would have its management and control in Ireland and would be regarded as an Irish resident subject to tax on worldwide income, Y would have its management and control in Bermuda, Cayman or another tax-free jurisdiction, and, although incorporated in Ireland, would be regarded as a non-resident and would thus be outside the ambit of Irish corporate tax. Y would hold valuable IP, intangibles and other assets and license those to Z, which would further sub-license to group companies in various countries. The trading test would be passed because Z (a related company) carries on a trade in Ireland. If X is a US, EU or other treaty country company, then Y would be ultimately controlled by treaty residents and would, thus, pass the control test. The control test may also be passed through the stock exchange listing of X or an affiliate.

In the simple scheme outlined above, generally referred to as “double Irish”, Z would be taxable in Ireland on its worldwide trading income at the standard Irish 12.5% corporate tax rate for trading income.

The Irish taxable base would, however, be substantially eroded by the fees, royalties and other payments made by Z to Y on account of the use of IP, intangibles and other assets. These payments are not taxable in Ireland at the level of recipient Y because it is a non-resident. Tax savings could be amplified by adding concentric circles, such as a Dutch intermediary company to mitigate withholding tax on worldwide inbound payments to Z. Alternatively, the use of the generous Irish rules for the mitigation of double taxation would result in the elimination of Irish tax on dividend, interest or royalty income received. Further, careful planning would mitigate taxes on the original contribution (or the joint-development) of the IP, intangibles and other assets from X to Y, and would avoid anti-deferral rules potentially applicable in the jurisdiction of X. Such mitigation is often achieved in the United States through a combination of the disregard of Y under the Check the Box regulations and the use of the “same country manufacturing exception” under Subpart F.

However, as of January 2015, all new companies domiciled in Ireland must also be tax-residents there, which eliminates the “Double Irish.”