Ireland: Introduction of New Controlled Foreign Company Rules

Ireland has taken steps to prevent foreign businesses gaining an unfair tax advantage - how do the new rules work?

On 1 January 2019, new rules regarding Controlled Foreign Companies (CFC) came into effect in Ireland. The CFC rules introduced in Ireland fall under a wider piece of European Union legislation known as the Anti-Tax Avoidance Directive (ATAD), which directs member states to put specific laws in place which meet its legal standards. The ATAD broadly targets corporate taxpaying entities with international footprints, and includes a specific focus on profit shifting strategies employed by certain businesses.

Ireland’s Department of Finance published the CFC rules as part of its Finance Bill (specifically under Section 25) in October 2018. The Bill was debated in the Oireachtas over the following weeks, before it was signed into law at the end of the year. The CFC rules are not intended to function as a way to increase tax revenue for government coffers but prevent exploitation of the existing system by multinational companies.

What are the CFC Rules?

A company is considered to be in control of a subsidiary if it has direct or indirect ownership, or if is has an entitlement to more than 50% of the subsidiary’s shares. With that in mind, the new CFC rules are designed to prevent businesses from abusing existing laws in order to direct profits from their companies in Ireland to offshore subsidiaries located in more favourable tax jurisdictions. In more detail, the rules target a CFC’s undistributed income - which may have been accumulated for the specific purpose of securing a tax advantage - and attribute it to the controlling company in Ireland, where it will be subject to tax.

Ireland’s new CFC rules function in the following way:

  • Irish parent companies are taxed on profits which are estimated through transfer pricing principles.
  • When the Irish parent company exercises “significant people functions” in Ireland, the amount of income it generates is taxed under CFC rules - and the charge determined using the assets and risk that the controlling company bears.
  • Conversely, in circumstances where there are no significant people functions in Ireland (attributable to the assets and risk exposure of the CFC), no tax is due under the CFC rules.
  • The tax rate applied varies depending on the character of the income: trading income is taxed at 12.5%, while non-trading income is taxed at 25%. 

The CFC rules do not, as of yet, give any detail on provisions being considered for low-taxed ‘cash box’ companies.

CFC Rule Exemptions

In certain circumstances, exemptions from the CFC rules have been made. Those exemptions, and their qualifying criteria, are as follows:

  • Exemption for effective tax rate: If a CFC is paying a higher rate of tax in its home territory than it is in Ireland.
  • Exemption for low profit margins: If a CFC makes accounting profits which are less than 10% of its operating costs.
  • Exemption for accounting profits: If a CFC’s accounting profits are less than €750,000 - and of those profits, accounting income is less than €75,000, or non-trading income is less than €75,000.
  • Grace period exemption: CFCs which have been newly acquired (and meet certain conditions) have a 1 year grace period before CFC tax rules are applied.

An additional exemption applies in circumstances were CFC arrangements are entered into on an arm’s length basis, or are subject to the Irish transfer pricing regime.

Impact On Employers

With the introduction of the new CFC rules, employers must review their tax and financial processes, and the details of their subsidiary arrangements. The grace period means that new businesses will have time to adapt to their environment - but since the rules are now in effect, established employers should waste no time in making adjustments.

For more information about Ireland’s income and company tax regimes, check out activpayroll’s Global Insight Guide to Ireland.