International Comparative Legal Guides Corporate Tax 2020 A practical cross-border insight to corporate tax law 16th Edition Featuring contributions from: Blackwood and Stone LP M&T Lawyers Slaughter and May Boga & Associates Maples Group SMPS Legal Braekhus Advokatfirma DA Marval, O’Farrell & Mairal Tirard, Naudin Buren N.V. Mul & Co Totalserve Management Limited Carey Nagashima Ohno & Tsunematsu Vivien Teu & Co LLP Eric Silwamba, Jalasi and Linyama Nithya Partners, Attorneys-at-Law Walder Wyss Ltd. Legal Practitioners Oppenhoff & Partner Waselius & Wist Gibson, Dunn & Crutcher LLP Pepeliaev Group Webber Wentzel Greenwoods & Herbert Smith Freehills Pirola Pennuto Zei e Associati Weil, Gotshal & Manges LLP GSK Stockmann Schindler Attorneys Wong & Partners KYRIAKIDES GEORGOPOULOS Law Firm Sele Frommelt & Partner Yaron-Eldar, Paller, Schwartz & Co. Lopes Muniz Advogados Attorneys at Law Ltd. 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This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations. 16 Chapter 3 The Growing Influence of the EU in the Tax Affairs of Member States – A Legal Perspective Andrew Quinn Maples Group David Burke Introduction of Finance stated that work has commenced to bring forward the transposition process. This could lead to the introduction The influence of the EU in the affairs of the EU Member States of the rules in 2020 or 2021. continues to grow on foot of the principle of “ever closer union” (c) Financing arrangements which predate 17 June 2016 are enshrined in the 1957 Treaty of Rome. This influence has limited excluded from the interest limitation rules, under so-called the sovereignty of Member States in many areas. However, tax “grandfathering” provisions, provided the loans are not modified matters are different in that the passage of EU tax legislation subsequent to that date. In very broad terms, it is expected that requires unanimous approval. Tax is therefore regarded as an Irish financing structures involving Irish entities which hold exclusive competency of the Member States. However, this has loans or are engaged in loan origination or financing transactions changed in recent years. This chapter examines the growing should not be negatively impacted. In addition, it is expected influence of the EU in the tax affairs of the Member States and how that Irish regulated funds, such as ICAVs, will not be impacted this is likely to increase in the coming years. due to their status as investment funds. Beyond that, it is antici- pated that Ireland will seek to implement the exemptions ATAD allowed for in ATAD, including for standalone entities. The most significant incursion by the EU into the tax affairs of EU Anti-hybrid rules: Member States is the European Anti-Tax Avoidance Directive (“ATAD”) which was formally adopted on 12 July 2016 (and (a) ATAD includes measures aimed at neutralising so-called hybrid modified in 2017) after unanimous approval of all 27 Member States. mismatch arrangements in the sphere of international tax planning. ATAD contains six measures that draw inspiration from actions (b) Hybrid mismatches generally arise as a consequence of proposed by the OECD as part of its BEPS project. differences in the legal characterisation of entities or financial ATAD is noteworthy not only for achieving unanimity amongst instruments due to the interaction between the legal systems of all Member States on such significant tax measures but also for the two jurisdictions. Anti-hybrid rules seek to counter adverse tax short time between first draft and approval, a mere six months. outcomes that exploit differences in tax treatment between such An EU directive lays down certain results that must be achieved jurisdictions – for example, where the same instrument generates but each Member State is free to decide how to transpose directives a payment which is deductible in one jurisdiction but not taxable into national laws. The power of EU directives over measures in another jurisdiction. suggested by the OECD on BEPS, for example, is that directives (c) The anti-hybrid rules contained in ATAD concern the regulation must be followed in each Member State of the EU on pain of of hybrid mismatches that arise between associated taxpayers in penalty for failure to properly implement in the time required. two or more Member States or structured arrangements between The following sets out the key provisions of ATAD and considers parties in different Member States where either (i) a double their impact in Ireland. deduction, or (ii) a deduction without inclusion outcome is attributable to the differences in the legal characterisation of a Interest limitation rule: financial instrument or entity. (i) A double deduction mismatch outcome arises where an (a) Article 4 contains one of the key provisions of ATAD and expense is deductible for tax purposes twice. Where a hybrid mandates the introduction of an interest limitation rule. mismatch results in a double deduction, the deduction should Essentially, such a rule would restrict borrowing costs to 30% of be granted only in the Member State where the payment has the taxpayer’s EBITDA, subject to certain exceptions. its source. Traditionally, Ireland did not have any such fixed ratio interest (ii) A deduction without inclusion mismatch outcome covers limitation rules in place. The interest limitation rule will impact situations where a payment that is deductible for tax purposes companies based in Ireland, including trading companies, property in the payer’s jurisdiction but is not included in the taxable holding companies, the aircraft leasing sector and securitisation income of the receiving taxpayer. ATAD requires EU companies which are also known as “section 110 companies”. Member States to either delay and/or deny the deduction of (b) Ireland applied, as permitted in Article 4, to defer introduction payments, expenses or losses or warrants the inclusion of of interest limitation until 2024 on the basis that Ireland’s payments in the computation of taxable income. existing interest rules are at least equally effective to the rules (d) However, the above anti-hybrid rules only apply where the contained in ATAD. However, it is understood that the EU hybrid mismatch arises: (i) between head office and Permanent Commission does not share that view and issued a formal notice Establishment (“PE”); (ii) between two or more PEs of the to Ireland in July 2019 to begin implementation. In a tax same entity; (iii) between associated enterprises; or (iv) under a strategy paper released on 17 July 2019, the Irish Department structured arrangement. ICLG.com Corporate Tax 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples GroupXX 17 (i) An associated enterprise means an entity or an individual able for any foreign tax paid by the CFC on its undistributed which holds, directly or indirectly, a participation of more income. than 25% (50% in the case of a hybrid entity) in the voting rights, capital ownership or profits of another entity, as well Exit Tax: as entities that are part of the same consolidated group for financial accounting purposes or enterprises that have a (a) Ireland has introduced an ATAD compliant exit tax which significant influence in the management of the taxpayer. replaces the existing Irish exit tax regime which applies where a (ii) Where a hybrid mismatch arises as a result of a payment taxpayer moves assets or migrates its tax residence out of under a financial instrument, the “associated enterprise” concept Ireland. While the introduction of such an exit tax was required also includes a person who “acts together” with another person under ATAD, the surprise to the industry came in the timing of in respect of the voting rights or capital ownership of an its implementation with Financial Resolutions passed by the entity. That person will be treated as holding a participation Irish Parliament on 9th October 2018 bringing the regime into in all of the voting rights or capital ownership of that entity immediate effect from the midnight of that day. holding by the other person. (b) Exit tax will now be levied at 12.5% on any unrealised gains (iii) A structured arrangement is defined as “an arrangement involving where a company migrates or transfers assets (including IP a hybrid mismatch where the mismatch outcome is priced into the terms assets) out of the charge to Irish tax, including where a company of the arrangement or an arrangement that has been designed to produce ceases to be tax resident in Ireland or where a company that is a hybrid mismatch outcome, unless the taxpayer or an associated enter- resident in another Member State transfers assets from an Irish prise could not reasonably have been expected to be aware of the hybrid permanent establishment to another territory. mismatch and did not share in the value of the tax benefit resulting from (c) The exit tax will not apply where the assets which are disposed the hybrid mismatch”.