In December 2021, Ireland’s Minister of Finance, Paschal Donohoe, announced the launch of a public consultation on the introduction of a territorial corporation tax regime in Ireland.
The proposal was included in Ireland’s updated Corporation Tax Roadmap, published in January 2021. This included a series of commitments to modify and enhance Ireland’s corporation tax rules.
According to the Government, with the OECD 140-member Inclusive Framework having reached a broad agreement on international tax reforms to address the challenges of the digital economy, now is the “opportune time” to reflect on the merits of introducing a territorial corporate tax regime.
Worldwide Versus Territorial
Ireland currently has a worldwide system of taxation whereby a resident company’s entire income – including domestic and foreign income – is potentially within the scope of corporation tax.
Ireland, like many jurisdictions, provides relief for tax paid on foreign-source income at source by way of a foreign tax credit. This may result in the tax being exempt from tax in Ireland, although sometimes it will result in an Irish company being liable for some tax in Ireland.
Ireland is considering adopting a system that is used by the great majority of OECD countries — a participation exemption (or branch exemption) system. Under such a "territorial tax system", a company typically pays tax only on profits arising from activities in that jurisdiction, with foreign-sourced income fully exempt from tax.
Many jurisdictions, including most EU member states, operate territorial tax systems that use an "exemption method" of providing double tax relief, which means that foreign-source income is not taxed when received by a resident company providing such income is taxed in the country of source.
This participation exemption approach to relief for foreign taxation, being considered by Ireland, typically extends to dividends from foreign direct investments and gains from disposals of such investments.
While Ireland’s tax regime provides credits for foreign tax paid, as already noted, companies may still have an, albeit limited, Irish tax liability. Further, the consultation paper notes that the double tax relief provisions in Irish tax law are complex, having evolved over many years in response to changes in policy and to accommodate principles established in European case law. Therefore, a territorial system could provide simpler and more certain rules for businesses, while potentially reducing their overall profit tax burden.
The change could make Ireland more attractive as a holding company domicile.
The Irish Government says the regime would include “robust” anti-avoidance measures.
The consultation, which concludes on March 7, 2022, is intended to serve as a scoping exercise to identify the benefits, costs, opportunities and risks of switching to a territorial tax regime.