Unlike indirect taxes, direct taxes are not expressly dealt with by the EU treaties. Direct taxes are solely an area of national competency, which only must be exercised in accordance with the EU treaties. Therefore, direct taxes are less likely to be directly affected by Brexit.
A. EU Directives
The EU Treaties authorize the EU Council to issue directives to aid intra-EU trade and investment, as well as administrative co-operation. The directives require unanimity from each Member State before the Member State is required to implement it into national law. In Ireland, the EU directives which have been transcribed into domestic law are as follows:
- Parent/Subsidiary Directive: eliminates withholding taxes on dividends paid to parent companies in EU Member States;
- Mergers Directive; defers capital gains tax which would otherwise accrue on certain mergers, divisions, transfers of assets and exchanges of shares between companies from different EU Member States;
- Interest /Royalties Directive: eliminates certain withholding taxes on certain interest and royalty payments between companies from different EU Member States.
In the majority of cases, the domestic legislation in Ireland into which the directive has been transposed is drafted in terms that simply refer to “Member States” without naming specific jurisdictions. Consequently, as the provisions are formulated by reference to EU membership, presumably U.K. business will automatically cease to benefit from the preferential treatment offered by Ireland under these directives from the moment it exits the EU. Conversely, the U.K. will not be required to introduce into its domestic legislation the various anti-tax avoidance measures proposed by the recently enacted Anti-Tax Avoidance Directive which will take effect from 1 January 2019, assuming that it is no longer a member of the EU at that stage. However it should be noted that the U.K. has already published legislation to limit interest deductions and to address hybrid mismatches
Notwithstanding the non-application of the above directives which provide preferential treatment by Ireland to payments made to EU Member States, much of Ireland’s tax law has been drafted in such a way as to aid international trade and investment between overseas parties located both in the EU and in a tax treaty country. For example, withholding tax should not apply on dividend payments from Ireland where the recipient is located either in the EU or in a tax treaty country (provided certain other conditions are met). Therefore, although it would be necessary to review the particular circumstances, it is likely that domestic exemptions would continue to apply to payments made by an Irish resident company to a U.K. resident company.
B. Tax Treaty
From an international perspective, the ability to benefit from the Ireland/U.S. tax treaty may be somewhat restricted under the Limitation of Benefits provision (unless the U.S. issues a protocol), where an Irish company is ultimately owned by EU residents that are based in the U.K..
C. Domestic Legislation—Group Relief
As noted above, most of Ireland’s tax legislation is drafted to provide relief to companies resident in either the EU or a tax treaty country.
Group relief is available for losses where a qualifying group exists. The definition of what constitutes a qualifying group for loss relief purposes was extended in recent years to include companies resident in tax treaty countries. Under existing legislation, a qualifying group should exist for loss relief purposes where all the relevant companies are resident in the EU, EEA or a country with which Ireland has a double tax treaty and therefore there should be no impact by Brexit. However, where there is an Irish branch of a U.K. company, loss relief would not be available to be claimed from or surrendered to an Irish resident group company by that Irish branch
Where there is a transfer of assets inter-group, these assets can broadly only be transferred on a tax-neutral basis where both entities are within a qualifying Capital Gains Tax (“CGT”) group. However, in order to be in a qualifying CGT group, all entities must be EU resident or resident in an EEA state which has a double tax agreement. Therefore, assuming that the U.K. does not get EEA status, if there is a U.K. resident holding company of two Irish resident companies, this could have the effect of breaking the group for Irish CGT relief purposes. Consideration would then need to be given to any potential clawback of any previous CGT intra-group relief claimed on prior transactions as well as the impact on future transactions.
