Revenue issues guidance on Dual Resident Entities

On 9 October, Revenue released a new Tax and Duty Manual, Part 35-01-11 Dual-Resident Companies, which addresses the application of Article 4 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ('the MLI') for dual resident companies.

Background to the MLI

The MLI was introduced by the OECD to implement minimum standard changes to the functioning of existing double tax conventions. The MLI operates by introducing a series of tax treaty measures with the aim of updating international tax rules and lessening the opportunity for tax avoidance by multinational enterprises. The MLI is restricted solely to tax agreements and does not affect any provision of domestic law.

Ireland deposited its instrument of ratification of the MLI, together with a list of reservations and notifications, on 29 January 2019. This means that the MLI came into force for Ireland from 1 May 2019 and will enter into effect for any relevant treaty partner country (where the MLI was also in force in that country on or before 1 May 2019) from:

• 1 January 2020 for taxes withheld at source, and
• For taxable periods beginning on or after 1 November 2019 for all other taxes

Article 4 – Dual Resident Entities

Article 4 of the MLI looks at dual resident entities and contains a tie breaker rule for determining the tax residence of companies which are deemed to be resident of more than one jurisdiction under domestic provisions. In such scenarios, Article 4 provides that the competent authorities of the relevant jurisdictions shall 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. Where an agreement cannot be reached, the company shall only be entitled to treaty benefits to the extent that the competent authorities are in agreement.

Ireland adopted Article 4 when depositing its interest of ratification of the MLI, meaning the tie breaker rule will impact on Irish tax treaties where the corresponding treaty partner has ratified the MLI and has also opted for the same rule. The new manual notes that the tie breaker rule will have effect at the earliest for taxable periods beginning on or after 1 November 2019.

When determining whether any of Ireland’s tax treaties will be impacted by this new tie breaker rule, consideration will need to be given to the positions taken by both Ireland and the corresponding jurisdiction in their deposited interest of ratification positions. The manual gives a number of examples of treaties that may be affected including the United Kingdom, Poland, Israel and New Zealand.

The Irish Government recently negotiated a new treaty with the Netherlands which contains many of the provisions already contained in the MLI, including the tie breaker test under Article 4 and as such, these provisions will apply once the new treaty comes into effect.

Mutual Agreement Procedures (‘MAP’)

The new manual notes that when the tie breaker rule is being considered, the taxpayer may apply to the competent authority of either jurisdiction to initiate the MAP request. Furthermore, the manual outlines the process for initiating such a request, noting that in addition to following the published MAP Guidelines, the application should include the following:

i. Details of dual-residency, referring to the laws of Ireland and the other jurisdiction and to the facts and circumstances giving rise to such dual resident status;

ii. Determination of a single jurisdiction of residence under the pre-MLI corporate tie-breaker provisions of the relevant DTC and confirmation of that determination (if applicable);

iii. Details and analysis of issues foreseen in relation to the determination of residence under the post-MLI tie-breaker rule;

iv. Any other information, with supporting documentation, in relation to the surrounding facts and circumstances, or analysis of these, that may be relevant for the purposes of determining a sole residence for DTC purposes.

Conclusion

Companies will need to be aware of the impact that the new tie breaker rule will have on them, particularly where there is a risk that they might be considered dual resident for tax purposes under domestic provisions. Should you require any assistance in determining whether you may be impacted by the new tie breaker rule or if you require any assistance in making a MAP application, please reach out to your usual Deloitte contact.