In the foreword to this new edition, Michael Feeney writes:
"From a company tax viewpoint, the three most significant changes introduced by FA 2018 are the introduction of the controlled foreign company provisions, the overhaul of the capital gains exit tax regime, and the numerous amendments to the film relief provisions. These are covered in this twenty-third edition of Feeney: The Taxation of Companies as are a number of other changes of relevance to companies. Also included are comments on a number of recently decided Irish and UK tax cases.
Controlled foreign companies
With the introduction of a new controlled foreign companies (CFC) regime, as required by Directive (EU) 2016/1164 of 12 July 2016 (the AntiTax Avoidance Directive or ATAD), Ireland joins a somewhat elite club in which it is surely a dwarf among giants. CFC rules are an anti-abuse measure, intended to prevent the diversion of profits from Irish controlling companies to foreign subsidiaries located in low or zero tax jurisdictions.
Undistributed income of a CFC, arising from artificial arrangements made essentially to avoid tax, are attributed for taxation purposes to the Irish controlling company, or connected company, where that company has been carrying out ‘significant people functions’ (SPFs) in Ireland.
There are exemptions for CFCs with low profits or with a low profit margin, or where the CFC pays a comparatively higher amount of tax in its territory than it would have paid in Ireland. 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 transfer pricing rules. Unless an exemption applies, undistributed income, with an Irish nexus by reference to Irish SPFs, which has been artificially diverted from Ireland, will fall to be taxed in Ireland. To prevent double taxation, a credit will be available against the CFC charge for foreign tax paid on the same income.
The legislation takes effect for accounting periods of controlling companies beginning on or after 1 January 2019.
A new Chapter 2 of Part 20 of the Taxes Consolidation Act 1997 replaces the existing, focused, anti-avoidance exit provision with a new broad-based exit tax charge, transposing Article 5 of the ATD into Irish tax law.
The new exit tax will apply on the occurrence of any of the following events occurring on or after 10 October 2018:
- where a company transfers assets from its permanent establishment in Ireland to its head office or permanent establishment in another territory,
- where a company transfers the business carried on by its permanent establishment in Ireland to another territory,
- where an Irish-resident company transfers its residence to another country.
The charge will not apply where the assets of the Irish-resident company continue to be used in Ireland by a permanent establishment of the company after the company has migrated.
The exit tax rate will be 12.5% but an anti-avoidance provision ensures that a rate of 33% will apply if the event that gives rise to the exit tax charge forms part of a transaction to dispose of the asset and the purpose of the transaction is to secure that the gain is charged at the lower rate. A new measure provides that exit tax in respect of non-resident companies can be recovered from another Irish-resident member of a group or from a controlling director who is Irish resident for tax purposes.
Another new provision relates to the base cost of an asset for exit tax purposes where the asset has been transferred to Ireland from another Member State. Provision is made for a deferral of exit tax by payment in instalments over five years in the case of an exit to an EU/EEA State. Exit tax will not apply to assets which relate to the financing of securities, assets given as collateral or where the asset transfer takes place to meet prudential capital requirements or for liquidity management, where such assets will revert to the permanent establishment or company within 12 months.
The section 481 film relief is extended by a further four years to 31 December 2024.
FA 2018 introduces a new, time-limited, tapered regional uplift of 5% for productions in areas designated under the State aid regional guidelines. The uplift will taper out over a period of four years. The 5% rate will apply in years one and two, and will be at 3% in year three and at 2% in year four.
A number of administrative changes are introduced to ensure that the credit operates in an efficient manner, including a provision for the credit moving to a self-assessment based system, an amendment to the application process to allow for the Department of Arts, Heritage and the Gaeltacht to issue a cultural certificate, and two amendments to ensure the relief remains State aid compliant.
Capital allowances changes have been made in three areas:
- 1.Amendments, to the scheme under which accelerated wear and tear allowances are available for capital expenditure incurred on the provision of certain energy-efficient equipment, provide for the enhanced administrative effectiveness of that scheme. A new definition of energy-efficiency criteria now provides a framework for which criteria can be specified through statutory instruments. This will allow the Sustainable Energy Authority of Ireland to publish on its website the list of products eligible under the scheme and to amend this list as appropriate, based on the new definition and criteria.
- 2.FA 2018 introduces a new accelerated capital allowances scheme for capital expenditure incurred on gas propelled vehicles and refuelling equipment used for the purposes of carrying on a trade. A wear and tear allowance of 100% is available for capital expenditure incurred between 1 January 2019 and 31 December 2021.
- 3.FA 2017 introduced a scheme of accelerated capital allowances for equipment and buildings used by employers for the purposes of providing childcare services or a fitness centre to employees, subject to a commencement order. FA 2018 introduces amendments to ensure that the relief is a general measure available to all employers, and to commence the relief with effect from 1 January 2019. As the FA 2017 measure was subject to a commencement order, but the amendment never took effect, this necessarily involves the repeal of that provision and the re-enactment of the relief in FA 2018.
Amendments to the scheme provide for the removal of the restriction on use of the relief by trades consisting wholly or partly of the provision of childcare services or fitness facilities, and the insertion of a new requirement that the facilities provided should not be accessible or available for use by the general public.
Loans to participators
TCA 1997, s 438A is an anti-avoidance provision which extends the scope of the income tax charge under TCA 1997, s 438 to loans made by a company controlled by, or which subsequently comes under the control of, a close company, where such loans would otherwise escape a charge under TCA 1997, s 438. A new anti-avoidance provision is inserted into TCA 1997, s 438A to ensure that certain tax avoidance arrangements, which are not currently caught by the provisions, will fall within the scope of the TCA 1997, s 438 charge.
Relief for start-up companies
The three year tax relief for start-up companies under TCA 1997, s 486C is extended to start-up companies which commence a new trade in 2019, 2020 or 2021.
An amendment to the TCA 1997, s 291A intangible assets provision clarifies the operation of the 80% cap introduced by FA 2017 in circumstances where a company has incurred capital expenditure on a specified intangible asset or assets both before and on or after 11 October 2017. This will ensure that there can be no doubt as to the correct operation of the relief, as set out in detail in Revenue Guidance issued in January 2018. The amendment applies as and from 11 October 2017, the date from which the 80% cap applies.
Knowledge Development Box
The Revenue Guidance Notes on the Knowledge Development Box regime have been updated and the resulting changes are reflected in the treatment of this topic in Chapter 7.
As mentioned previously, coverage of the KDB in this book includes practical examples based on these guidance notes. Again, the example incorporating double tax relief takes a different view regarding the correct method of calculating the relief as compared with the (latest available) Revenue version.
Patent royalties as a charge on income
In the Foreword to the 2017 edition of this book, it was contended in some detail that patent royalties paid by a company do not, if the strict wording of the legislation is to be followed, qualify for deduction as a charge on income. That contention remains, as unfortunately does the need to put the matter right."