For many years, numerous companies adopted what became a common global strategy of “offshoring” intellectual property (“IP”) in jurisdictions with favourable tax benefits and incentives to keep the effective rate of tax on related profits at a low level.
One of the most popular strategies involved the use of the “Double Irish” structure. This required the utilisation of two Irish incorporated companies: one being structured as Irish tax resident and the other structured as being managed and controlled from a low or nil tax “offshore” jurisdiction. In this structure the IP rights were held by the non-resident Irish company with a licence granted to the Irish resident company, which allowed royalty and related income to flow from customers through Ireland with a marginal tax charge arising. In some cases, a further company, typically incorporated in the Netherlands, was inserted in the structure so royalties would flow from the Irish tax resident company to the Netherlands and onwards to the non-resident Irish company.
Any business using this structure needs to take immediate action.
Irish tax legislation was amended effective from 1 January 2015 to prevent the incorporation of an Irish company which would be treated as tax resident in an “offshore” tax jurisdiction that did not have a Double Tax Treaty in place with Ireland. Grandfathering rules were introduced for existing structures, which allow the residence treatment to survive until 31 December 2020.
Effective 1 January 2021, the Irish tax rules will deem any Irish incorporated company as tax resident in Ireland, unless it is managed and controlled from a country within the EU or with which Ireland has a Double Tax Treaty in place.
In addition to this, the Organisation for Economic Co-operation and Development (“OECD”), have concluded the Base Erosion and Profit Shifting (“BEPS”) programme and the recommendations of that initiative are being implemented globally by tax authorities and governments, including Ireland. Ireland has adopted the OECD recommendations around transfer pricing into domestic legislation effective from 1 January 2021. Part of this adoption will be the implementation of the provisions of DEMPE (“Development, Enhancement, Maintenance, Protection & Exploitation”) and economic substance as they pertain to IP ownership and exploitation. Broadly these provisions require a company to consider multiple factors when allocating IP related profits to group companies. These factors include consideration of which entity is carrying out each of the five DEMPE functions, and in which jurisdictions.
If your business is operating through an international structure that includes an Irish incorporated, but non-resident company and / or you have IP held outside your country of establishment, you need to take action now to review your tax position in light of the above changes.
At EisnerAmper Ireland our dedicated tax team are available to provide your business with the assistance required during the restructuring process, from initial advice and planning through to efficient execution and implementation.
Associate Director Tax
The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).
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