Under Section 23A TCA1997 a company that is incorporated in Ireland will be regarded for Irish tax purposes as being resident in Ireland and therefore liable to Irish corporation tax on the profits arising. An exemption can apply however, if a company is not regarded as resident in Ireland as the result of the provisions of a Double Tax Treaty. For the purposes of this blog, we will assume the directors are resident in the UK and therefore we consider the Ireland UK DTA. Ireland will always tax an Irish incorporated company unless it is proven it is tax resident in another country.
Ireland opted for the new rule under Article 4 of the MLI in respect of the determination, for treaty purposes, of the residence of dual-resident companies (‘the tie-breaker rule’). Article 4 paragraph 3 was replaced with the below:
Where by reason of the provisions of this Convention a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of this Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by this Convention except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting States.
The tie-breaker rule provides that, in cases of corporate dual-residence, the competent authorities of the Contracting Jurisdictions will attempt to determine a sole jurisdiction of residence by mutual agreement having regard to that company’s place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. Most of Ireland’s existing DTCs follow the pre-2017 OECD Model Tax Convention rule for corporate dual residence and the sole jurisdiction of residence is determined using the place of effective management of the company. Under the tie-breaker rule, a dual-resident company will lose its automatic single jurisdiction of residence status for treaty purposes that is based on place of effective management only. Instead, the competent authorities will endeavour to resolve the residence status by mutual agreement having regard to the relevant factors. If agreement cannot be reached on the residence status for treaty purposes, the company will only be entitled to treaty benefits to the extent that the competent authorities agree.
Central Management and Control is a concept which refers to the highest level of control i.e.strategic control of the company, including the formulation of company policy, how the company deals with financing and capital structure, etc. Note both countries will likely have this definition here.
It is a separate concept from the 'management and control' referred to in the 'day-to-day operations' of a company.
Where the central management and control of a company abides is ascertained by examining by whom and where strategic control of all operations occurs and is a question of fact.
Based on the facts of the various leading cases on company residence, it is possible to compile a list of questions that can be used to determine the residence of a company:
- Where are the questions of important policy determined?
- Where are the directors’ meetings held?
- Where are the majority of directors resident?
- Where are major contracts negotiated or agreements concluded?
- Have the directors delegated any of their powers? To whom and to what extent?
- Where are the shareholders’ meetings, both general and extraordinary, held?
- Where is the head office of the company?
- Where are the books of account kept?
- Where are the accounts prepared and examined?
- Where are the accounts audited?
- Where are minute books kept?
- Where are company seals kept?
- Where is the share register kept?
- From where are dividends, if any, declared?
- Where are the profits realised?
- Where is the company’s bank account on which the secretary etc. draws?
- Where is the company incorporated?
If all of the strategic decisions affecting a company are taken by the company directors, then the fact to be determined is where those decisions are taken and hence control is exercised.
No single factor above would in itself determine the tax residence of a company. However, to be satisfied that the central management and control of a company rests in a particular jurisdiction, you would expect that jurisdiction to be the answer to the majority of the above questions.
Some factors listed above will carry more weight than others. For example, regard to the composition of the board of directors and procedures applicable with respect to board meetings such as where the directors’ meetings take place (assuming that the directors are the persons who make key policy decisions on behalf of the company and are not simply acting in accordance with the instructions of others) is likely to be a key factor and would prove a strong indication of where the company is resident for tax purposes.
While the location of board meetings is a key factor and strong indicator of the company's residence, it would be worthwhile considering whether any of the other factors could be brought into play here. Obviously the more of these factors which can be ticked off as occurring in Ireland, the greater the indicator that the company is resident for tax purposes here.
Article 3 here requires effective management here - HMRC notes that Effective management will normally be located in the same country as central management and control but may be located at the company’s true centre of operations, where central management and control is exercised elsewhere. The Commentary to Article 4, paragraph 3 of the OECD Model Tax Convention (July 2008) defines the place of effective management as‘the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can only have one place of effective management at any one time’.
Competent authorities having to apply such a provision to determine the residence of a legal person for purposes of the Convention would be expected to take account of various factors, such as where the meetings of its board of directors or equivalent body are usually held, where the chief executive officer and other senior executives usually carry on their activities, where the senior day-to-day management of the person is carried on, where the person’s headquarters are located, which country’s laws govern the legal status of the person, where its accounting records are kept, whether determining that the legal person is a resident of one of the Contracting States but not of the other for the purpose of the Convention would carry the risk of an improper use of the provisions of the Convention etc.
The meaning of place of effective management and its distinction, if any, from the place of central management and control has yet to be considered by the courts. The phrase was considered by the Special Commissioners in the context of a dual resident trust in the UK (where it is also used as a treaty tiebreaker) in the 1996 decision concerning the Trustees of M N Wensleydales’ Settlement, which is at SpC 73, but the taxpayers did not pursue their appeal. The taxpayers’ aim was to have the trust considered resident in Ireland by operation of the tiebreaker and they arranged for formalities to be carried out by the trustees there. The Special Commissioners looked through the form to the substance of the arrangements, to the whereabouts of the proactive management decision making.
While Ireland will very likely accept that the company is Irish resident based on the carrying out of board meetings here and in any event, they have taxing rights - the challenge to the residency could likely come from the UK and it is this angle that would need to be considered and will likely need to take UK advice on same (which we would encourage). We believe the domestic legislation is the same as ours here so it would be centrally managed and control and incorporation test here. If the UK can show it is centrally managed and controlled there, then they can try to claim taxing rights if they believe effective management is carried out in the UK here.
In a case where an Irish incorporated company only has one employee who is the director and where that Director resides and is resident in the UK, there is a real risk under the tie breaker clause that the UK authorities would look to tax the profits here. Remember if it were UK resident then the 12.5% tax would not apply unless there is a permanent establishment in Ireland.
It is clear in this case that there is a risk the UK could try to claim tax residence of the company as it is a one-man band so therefore, we would encourage your client to seek UK tax advice as Ireland will continue to have the right to tax until it is agreed that it is UK resident. If the UK notice this, then they will look for back tax here (assuming it was resident in the UK). It is clear from Article 4 that both countries can tax until it has been agreed.
Section 23A TCA 1997 - Company Residence
Subject to subsection (2), a company which is incorporated in the State shall be regarded for the purposes of the Tax Acts and the Capital Gains Tax Acts as resident in the State.
(2)Notwithstanding subsection (1), a company which is regarded for the purposes of any arrangements, having the force of law by virtue of section 826(1), as resident in a territory other than the State and not resident in the State shall be regarded for the purposes of the Tax Acts and the Capital Gains Tax Acts as not resident in the State.
(3)Nothing in subsection (1) shall prevent a company that—
(a)is not incorporated in the State, and
(b)is centrally managed and controlled in the State,
being resident in the State for the purposes of the Tax Acts and the Capital Gains Tax Acts.
Article 4 of DTA
(1) For the purposes of this Convention, the term "resident of a Contracting State" means, subject to the provisions of paragraphs (2) and (3) of this Article, any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature; the term does not include any individual who is liable to tax in that Contracting State only if he derives income from sources therein. The terms "resident of Ireland" and "resident of the United Kingdom" shall be construed accordingly.
(2) Where by reason of the provisions of paragraph (1) of this Article an individual is a resident of both Contracting States, then his status shall be determinedin accordance with the following rules: (a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests); (b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode; (c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national; (d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement
(3)Where by reason of the provisions of this Convention a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of this Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by this Convention except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting States.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.