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Goodbye IRNR Back  
By 1 October all Irish registered companies will be within the Irish tax net fully unless they have managed to avail of a limited number of exemptions. The exemptions relate mainly to use by multinationals in relation to an Irish trading operation, or residence in a treaty state.

The Finance Act 1999 made a fundamental change to the basis of taxation of companies in Ireland. A company which is resident in Ireland for tax purposes is liable to Irish tax on its income and capital gains world-wide. However, prior to the Finance Act 1999, a company was regarded as resident in Ireland only if it was managed and controlled here. That generally meant that Ireland was the place where the board of directors met. If a company wasn’t resident in Ireland, it was liable to Irish tax only on Irish source income, and to a limited degree on certain capital gains arising in Ireland.

Time up
The Finance Act 1999 changed all of that by providing that Irish registered companies, even if not managed and controlled in Ireland, should be regarded as resident here for tax purposes. It phased in that rule. It applied it from 11 February 1999 to companies being newly formed. However the rule applies to companies existing on 11 February 1999, only with effect from 1 October 1999. The transition period is now almost at an end.

The companies at whom the legislation was aimed were popularly known as ‘IRNRs’. This stood for ‘Irish registered non resident’ companies. Nobody knew for sure how many such companies existed. Estimates had circulated that the figure was in the region of 40,000 but official sources cast doubts on the reliability of that estimate.

IRNRs are a relatively recent phenomenon, at least on a large scale. For decades foreigners had used UK registered companies, managed and controlled out of the UK, in order to transact business. The UK’s rules for taxing companies were similar to those in Ireland prior to 11 February. The UK was seen as a ‘respectable jurisdiction’ and the use of a UK company inspired confidence in people dealing with the company, and in foreign tax authorities (many of whom assumed the company was UK resident for tax purposes).

This happy state of affairs was brought to an end when the UK changed the law to make registration in the UK a basis for residence for tax purposes there. It provided a relatively lengthy phasing in period. It would seem that many former users of UK companies turned to Irish companies as a substitute.

The Irish authorities on the one hand had an opportunity to raise substantial tax revenues by imposing a flat charge of tax on such companies. If there were indeed 40,000 of them, a £2,000 per annum flat charge would raise £80m! This opportunity was not taken up and instead we adopted the UK approach of discouraging such companies. This was done as it was felt that the uses to which the companies were being put (allegedly in some cases tax evasion or fraudulent activities) damaged the reputation of legitimate Irish companies and in particular of companies in the IFSC.

Some safe
When the rules were changed to make Irish registered companies resident here for tax purposes, certain exceptions were provided for. The exceptions fall into two broad categories:
l Irish registered non resident companies used by multinationals to structure trading activities in Ireland. There are legitimate foreign tax planning reasons why a multinational might wish to use an IRNR in structuring its Irish investment. This is particularly true of US multinationals. This has been catered for in that if an IRNR is ultimately controlled by persons in a treaty state (which would include the USA) or in the EU and either carries on a trade in Ireland or is related to a company which carries on a trade in Ireland, the new rules will not apply to it.

l A company which is resident in a state with which Ireland has a double tax agreement is also excluded from the new rules. In this case ‘residence’ does not mean that the company has to be liable to tax in that other state, but only that under the terms of the relevant treaty it should be defined as a ‘resident of’ that other state. This is somewhat paradoxical as many treaties will define a company as a ‘resident of’ that state on the basis of it being managed and controlled there but will not, under its domestic tax laws, impose tax on that company if it is not registered there!

Some of our treaty states impose very low rates of tax on resident companies not doing business locally in that state (eg Cyprus, Hungary, Madeira Zone in Portugal, to name a few).

What now?
Those IRNRs who have not buried their head in the sand have probably been using the last eight months to liquidate, reorganise themselves to a company registered in some other ‘respectable jurisdiction’, or will have taken up residence in one of the treaty states which do not tax on the basis of management and control. Some no doubt will ignore the new tax rules for a time. However failure to make tax returns can lead to their being struck off the companies register.
The Finance Act 1999 also made provision for increased reporting especially as regards place of residence, nature of business, and ultimate ownership.

If indeed there ever were 40,000 IRNRs, they must now be like a biblical plague of locusts, swarming out of Ireland and towards some new unsuspecting jurisdiction.

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