Tax Treaty Matters
A tax treaty is an agreement between two countries to mitigate the effects of double taxation of the same income or gains in those countries.
Define the taxes covered and residents eligible for benefits;
Define how the income of residents of the treaty countries may be taxed;
Reduce or eliminate the amount of tax withheld/paid by residents of the treaty countries;
Provide for the exchange of information; and
Provide procedural frameworks for enforcement, dispute resolution and termination of the treaty.
In some cases the double tax relief mechanism operates such to tax the income in the country of residence and exempt it in the source country. In the remaining cases, the tax is deducted at source in the country where the income or gain arises and the taxpayer receives a foreign tax credit in their country of residence to reflect that the tax has already been paid.
The following are examples of how the application of the provisions of a Double Tax Treaty (“DTT”) will eliminate or minimise double taxation of direct taxes, such as Income Tax, Capital Gains Tax and Dividend Withholding Tax.
A director of an Irish incorporated company is chargeable to tax (PAYE and Universal Social Charge (“USC”)) in Ireland on the income attributable to such directorship irrespective of the director’s tax residence or where the duties of the office of director are exercised.
However, such directorship income may, in some instances, be relieved from PAYE under the terms of a double taxation agreement between Ireland and the country of residence of the director. The USC does not apply to income, or to that element of income, relieved from the charge to income tax under a double tax treaty.
Capital Gains Tax
The general terms of a double tax treaty provide rules for source country and residence country taxation of capital gains. The source country retains the right to tax gains from the disposal of immovable property situated in the State.
For example, Article 13.1 of the Ireland/Greece DTT states-
“Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.”
This means a gain made on the disposal of a property in Greece may be taxed in Greece. However, the treaty also provides that the Irish company will be entitled to credit the Greek tax liability against the Irish CGT liability arising on the disposal-
Article 24.2 of the treaty states-
“Subject to the provisions of the laws of Ireland regarding the allowance as a credit against Irish tax of tax payable in a territory outside Ireland (which shall not affect the general principle hereof):
a. Hellenic tax payable under the laws of the Hellenic Republic and in accordance with this Convention, whether directly or by deduction, on profits, income or gains from sources within the Hellenic Republic (excluding in the case of a dividend tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any Irish tax computed by reference to the same profits, income or gains by reference to which Hellenic tax is computed.”
An exception may apply in cases where a resident of a Contracting State was a resident of the other Contracting State any time in the three years preceding the disposal of property. In these cases the other Contracting State holds full taxing rights over gains from the disposal.
Dividends to Non-EU Treaty States
A non-EU Treaty State is a State outside the EU that has a DTT in force with Ireland (e.g. Mexico).
Irish domestic tax legislation (S. 172D of TCA 1997) provides that dividends paid to individuals/companies tax resident in non-EU Treaty States may be paid exempt from Irish Dividend Withholding Tax (“DWT”). Therefore by virtue of Ireland having a DTT with Mexico, dividends paid to individuals/companies tax resident in Mexico may be paid without giving rise to Irish DWT.
Certain declarations, made by the recipient to the paying company, may be required in order to avail of the above DWT exemption.
Although DWT may not apply a DWT return must be submitted to the Revenue Commissioners in respect of all distributions made by an Irish company, irrespective of whether the distribution is liable to or exempt from DWT. The DWT return is due by the 14th day of the month following the dividend payment.
Ireland’s Tax Treaty Network
Ireland has signed double taxation agreements with 68 countries, 63 treaties are ratified and in effect.
Details of the agreements, including new agreements and protocols to existing agreements may be found on the Revenue Commissioners’ website.