Saturday, Dec 21, 2024

16:40

Residence, Ordinary Residence and Domicile - How much detail do you need to include in an exam question.

Posted on: Friday, March 04, 2016

Residence, Ordinary Residence and Domicile - implications for an Individual’s liability to Income Tax

Section 819(1) TCA 1997 sets out the definition for “Residence.”



There are two basic tests:

The Current Year Test i.e. if an individual is present in Ireland for 183 days in a tax year he/she will be deemed to be Irish residence for Income Tax purposes.


The Look Back Test i.e. if an individual is present in Ireland for 280 days taking into consideration both the current and preceding calendar years together he/she will be considered Irish resident for Income Tax purposes providing that individual is present in Ireland for at least 30 days in a tax year.


It is important to note that when determining an individual’s residence, an individual is counted as being present in Ireland for “a day” if he/she is present in the state for any part of the day.



There are, however, two exceptions to this rule:

1. In situations where the individual remains “airside” throughout their time in Ireland or
2. In a situation where the individual’s time in Ireland is due to “force majeure” circumstances.

You should consult Revenue E-Brief 03/2009 for detailed guidance on this matter.



Section 820 TCA 1997 outlines a statutory definition for the term “Ordinary Residence”.



According to Section 820 TCA 1997, if an individual has been resident in Ireland for three years he/she will be deemed to be ordinarily resident in Ireland.



An individual ceases his/her ordinarily residence status in Ireland once that individual becomes non Irish resident for three consecutive years.





There is no statutory definition for determining whether an individual has an Irish “Domicile.”  Instead, it is a common law legal term with plenty of case law surrounding it.



Under common law, every person must have a domicile. An individual can only have one domicile at any particular time but he/she cannot be without a domicile.



There are three kinds of domicile to consider:

• Domicile of Origin
• Domicile of Choice
• Domicile of Dependence.

Now that we’ve established the rules for determining an individual’s residence, ordinary residence and domicile, please find a brief outline as to how this individual will be taxed in Ireland:

- If the individual is resident, ordinarily resident and domiciled in Ireland he/she liable to Irish Income Tax on his/her worldwide income wherever it arises.


- If the individual is resident and domiciled but not ordinarily resident in Ireland he/she liable to Irish Income Tax on his/her worldwide income wherever it arises.


- If an individual is resident and ordinarily resident but not domiciled in Ireland the individual will be liable to Irish Income Tax on (a) Irish source income, (b) Foreign employment income to the extent it relates to the duties being performed in Ireland and irrespective of where the salary/wage is paid, and (c) Foreign income to the extent it is remitted into Ireland.


- If an individual is resident but not ordinarily resident and not domiciled in Ireland the individual will be liable to Irish Income Tax on (a) Irish source income, (b) Foreign employment income to the extent it relates to the duties being performed in Ireland and irrespective of where the salary/wage is paid, and (c) Foreign income to the extent it is remitted into Ireland.


- If an individual is non-resident but ordinarily resident and domiciled in the state then he/she will be liable to Irish income tax on his/her worldwide income with the exception of income from the following (a) a trade or profession no part of which is carried on in Ireland, (b) an office or employment where all the duties of which are carried on outside Ireland with the exception of incidental duties and (c) other foreign income which is less than €3,810 per annum.


- An individual who is non-resident, non-ordinarily resident but domiciled in Ireland will only be liable to Irish Income Tax on Irish source income and income from a trade, profession or employment to the extent that the duties are carried out in Ireland.


- An individual who is non-resident, non-ordinarily resident and non-domiciled will only be liable to Irish Income Tax on Irish source income and income from a trade, profession or employment to the extent that the duties are carried out in Ireland.




For completeness sake, you should know how Non-resident directors of Irish incorporated companies are taxed.

A Director of an Irish incorporated company is deemed to hold an “Irish Public Office” and is, therefore, chargeable to tax in Ireland on the income attributable to such directorship irrespective of:

• his/her tax residence or
• where the duties of the office of director are actually exercised.

The directorship income may be relieved from the charge to Irish tax under the terms of a double taxation agreement between Ireland and the Director’s country of residence.





Residence– implications for a company’s liability to Corporation Tax

Prior to Finance Act 2014, under Section 23A(2) TCA 1997, the general rule of incorporation stated that if a company was incorporated in Ireland then it was deemed to be resident in Ireland which meant it was liable to Irish Corporation Tax on its worldwide profits.



There were two exemptions from this rule:

The Trading Exemption and
The Treaty Exemption


In situations where one or both of the above exemptions existed, a company was deemed to be resident in the place where it is centrally managed and controlled.

This rule also applied to non-Irish incorporated entities including branches or agencies.



“Central management and control” relates more the strategic control of the organisation rather than the control of day to day running of a company.



In order to determine the residence of a company in relation to central management and control the following questions should be asked:

• Where are the questions regarding policy made?
• Where are the directors’ meetings held?
• Where are the majority of directors resident?
• Where are major contracts negotiated?
• Where are major agreements concluded?
• Where are the shareholders’ meetings held?
• Where is the head office of the company?
• Where are the books of account kept?
• Where are the accounts prepared and examined?
• Where are the accounts audited?
• Where are the minute books, company seals and share register kept?
• From where are dividends declared?
• Where are the profits realised?
• Where is the company incorporated?

It is not possible to determine the tax residence of a company using just one of the above questions.  It would be expected that the answer to the majority of the questions would be that particular jurisdiction/country.





Finance Act 2014 Changes

Finance Act 2014 introduced amendments to the corporate tax residence rules to address concerns about the “double Irish” structure.



The new rules state that an Irish-incorporated company will be regarded as Irish tax resident here unless it is deemed to resident in another country under the terms of a Double Taxation Agreement.  Therefore if, under the provisions of that treaty, an Irish-incorporated company is considered to be tax resident in another jurisdiction then the company will not be regarded as Irish tax resident.



These changes are in addition to the existing "central management and control test" which means that the new legislation does not prevent a non-Irish incorporated company that is managed and controlled in Ireland from being considered resident for tax purposes in Ireland.



The new provisions take effect from 1st January 2015 for companies incorporated on or after 1st January 2015.



For companies incorporated before 1st January 2015, the new provisions will come into effect from 1st January 2021.



As an anti-avoidance measure, however, the new legislation take effect for companies incorporated before 1st January 2015 where there is (a) a change in the ownership of the company as well as (b) a major change in the nature or conduct of the business of the company within the time-frame that begins one year before the date of the change of ownership and ending five years after that date i.e. occurring within a period of up to six years.



The aim of this anti-avoidance provision was to restrict the incorporation of companies between 23rd October 2014 and 31st December 2014 to 1st January 2015 where the primary intention was to avail of the extension.





What about Non-resident companies operating through an Irish branch or Agency?

A non-resident company may be liable to Irish Corporation Tax if it carries on a trade through a branch or an agency in Ireland.





What is a Branch or Agency?

“Any factorship, agency, receivership, branch or management”. – Section 4 TCA 1997




Does that mean that all Branches or Agencies will be liable to Irish Corporation Tax?

A branch or Agency may fall outside the scope of Irish Corporation Tax where the level of activities carried on by that non-resident company in Ireland is such that they do not create a Permanent Establishment (P.E.) in Ireland.




What is a Permanent Establishment?

Article 5 of the OECD Model Tax Treaty defines a Permanent Establishment as “a fixed place of business in which the business of the enterprise is wholly or partly carried on”.



Three criteria must exist in order for a Permanent Establishment to exist:

There must be an actual place of business. If an employee from an enterprise in one state is purely visiting a client in another state on a short term basis then this will not constitute a place of business and a Permanent Establishment will not be created.
The place of business must be “fixed”. 
The business of the company/enterprise must be carried on through the fixed place of business.


Examples include:

1. a place of management
2. a branch
3. an office
4. a factory
5. a workshop
6. a building site or construction or installation project which lasts for more than six months.

Let’s look at Article 5 Step by Step

Article 5(5) also deals with the creation of a Permanent Establishment by an Agent.



If an Irish business/enterprise has no fixed place of business in a country but it does have an agent or employee in that jurisdiction who lives there and works from home, an Agency Permanent Establishment could exist.  This must be a matter of fact



(Note: An employee will always be treated as an agent.)



Article 5(6) is an exception to the above paragraph.  It states that where a sales activity is carried out in another country by independent agents of the company/enterprise then a Permanent Establishment will not be deemed to have been created in the other country.   An independent Agent will always act in his/her best interest and not necessarily in the best interests of the enterprise/company.



Article 5(7) states that the presence of a “subsidiary” will not in itself create a Permanent Establishment.



What this means is, if the subsidiary acts as a “dependent agent” of its parent company then it can still constitute a Permanent Establishment under Article 5(5).



An example of this would be if the employees of the parent company frequently occupied the office space of the subsidiary company where they carried out duties that related to the business of the parent company/entity/enterprise then the parent company may be considered to have a Permanent Establishment in that country.





What next?

Once the existence of a Permanent Establishment has been established, Article 7 (Business Profits) should be considered.



If it has been discovered that no Permanent Establishment exists then you can ignore Article 7 OECD Model Treaty.





What does Article 7 say?

Article 7 (Business Profits) of the OECD model treaty provides guidance on how the business profits of an enterprise should be taxed once it has been established that a Permanent Establishment actually exists in another jurisdiction.



Where an overseas Permanent Establishment exists (i.e. in France) for an Irish company/business, Article 7 states that only the profits attributable to that Permanent Establishment, can be taxed in the overseas country (i.e. France).



The amount of profit to be allocated to the Permanent Establishment will depend on the facts of the business operations.  When answering an exam question, it should always be kept in mind that the Permanent Establishment should be treated as if it were operated as “a separate and independent business”.





Any other issues to consider?

Article 7(3) states that where one contracting state taxes the profits of a Permanent Establishment then the other Contracting State should give relief for that tax paid.



Both tax authorities should agree to any adjustments required.