Ireland Fact-File Part 3:
Individual Business International Taxation

3.3 Ireland Double Tax Treaties

Double tax treaties

Ireland has more than 50 double tax treaties in place, which in certain circumstances can reduce withholding tax on income earned abroad by individuals.

Double tax treaties (DTTs, or DTAs) are designed to prevent the same income from being taxed twice in situations where the authorities of two different countries have equal taxation claims on it.

Where a DTT follows the OECD (Organisation for Economic Cooperation and Development) model, which most – but not all – Irish tax treaties do, the following areas are, inter alia, covered:

Benefits will only be extended to residents of the contracting states, and in a dual residence situation, there will be rules to determine a single state of residence (which in the case of a corporate entity, will usually be the state in which the effective management of the entity takes place, although sometimes this can be determined under the mutual agreement procedure, where this exists);
Taxes covered by the DTT will usually be income tax, corporation tax, and capital gains tax (with indirect taxes and inheritance and gift taxes excluded from the scope of the agreement);
The definition of a permanent establishment for tax residence purposes will be given.

Income from immovable property will usually be taxable in the state in which said property is located, although the other contracting state may tax the income, as long as double taxation relief is granted.

The contracting states will generally agree to refrain from taxing the business profits of an enterprise resident in the other state, unless the enterprise in question has a permanent establishment in that state, in which case the other State may only tax the profits that can be attributed to the permanent establishment. The Revenue Commission offers the following guidelines with regard to this:

“The profits to be attributed to the permanent establishment are those that it would have been expected to make if it were a distinct and separate enterprise. This is what is known as the arms-length rule.”

“The article permits the profits of a permanent establishment to be determined on the basis of an apportionment of the total profits of the enterprise, provided such a determination is customary in the Contracting State concerned and the result is in accordance with the principles of the article. Profits of branches of foreign insurance companies are sometimes calculated on an apportioned basis.”

“No profit is to be attributed to a permanent establishment by reason of the mere purchase of goods by the permanent establishment. This provision is not concerned with an establishment existing solely for purchasing. Such an establishment would not be a permanent establishment under the principles of Article 5. It is concerned with a permanent establishment which carries on other business but also performs a purchasing function for its head office. In such a case, no profits are attributable to the purchasing function.”

Where an enterprise has a permanent establishment in a Contracting State that receives any type of income dealt with in other articles, eg, interest, then the taxation of that income is determined by the rules of that other article.

* The use of the arm's length principle when looking at profits made by an enterprise from dealings with an associated enterprise in the other contracting state is put in place, meaning that they may be increased to the level they would have been if the enterprises had been independent and dealing at arms-length;

* The tax treatment of dividends will be outlined, and will usually be that the dividends should be taxed in the country of which the company paying the dividends is a resident, usually at a specified lower rate than would usually apply.

* The rules governing the taxation of interest will be outlined, and will usually be that it should taxed in the contracting state in which it arises, but if the beneficial owner of the interest is a resident of the other state, then the rate will be limited to a specified percentage of the gross interest payment. However, in several treaties agreed by Ireland, all (or just certain types) of interest payment may be completely exempted from taxation. According to Revenue guidance on determining where the interest has arisen:

“Interest is deemed to arise in the Contracting State when the payer of the interest is a resident there. However interest shall be deemed to arise in a Contracting State, even if the person paying the interest is not a resident, if the person has a permanent establishment in that State and the interest is borne by that permanent establishment.”

* The tax treatment of royalties (defined as “payments in respect of copyright of literary, artistic or scientific work as well as patents and trademarks”, although sometimes including leasing payments) will be outlined, and will usually be that the taxation in the source State of royalties paid to a resident of the other State will be limited, with the source State retaining the ability to tax royalties that can be attributed to a permanent establishment of the beneficial owner in that State.

According to the Revenue guidance: “Royalties are deemed to arise in the Contracting State that the payer is a resident of or, if paid in connection with a permanent establishment in the Contracting State, in the State where the permanent establishment is situated.”

* The tax treatment of capital gains will be outlined, and will generally (with certain exceptions, including for gains relating to permanent establishments and gains from international shipping or international air traffic) be that the source state will retain the right to tax gains from “the alienation of immovable property situated in that State”. However, an exception is made in the majority of Irish treaties for cases where a resident of one of the contracting states was a resident of the other state at any point during the three years prior to the disposal of the property in question. In such instances, the state in which the taxpayer was formerly resident will retain “full taxing rights” over the gains in question.

* With regard to income from ‘professional services' (such as those provided by doctors, lawyers, accountants, engineers, etc), the rule will usually be that the source State of such income may only tax it where it is attributable to a fixed base there. This provision is no longer contained in the OECD model treaty, but has been written into the majority of Irish treaties.

* With regard to the taxation of income from employment, the rules outlined in the DTT will usually be that payment in respect of employment received by an individual who is a resident of one contracting state may be taxed only in that state, “unless the employment is exercised in the other contracting state”. If that is the case, according to the Revenue, “the other State may tax the remuneration derived from the exercise of the employment in it. However, the remuneration will be taxable only in the State of residence if the recipient is present in the other State for less than 183 days in any twelve month period and the remuneration is paid by an employer who is not resident in the other State (or is not borne by a permanent establishment or fixed base which the employer has in the other State).”

Individuals employed in international shipping or air traffic are the exception here, and are usually taxed in the state in which the operator of the ship or aircraft is resident.

* In terms of the taxation of directors' fees, the rules will generally be that contracting states may tax fees paid by companies that are resident in that State for services performed by residents of the other contracting state in their capacity as board members of such companies.

* With regard to the taxation of artists and sports-people, who are resident in one of the contracting states and performing services in the other State, it is stated that “income derived by a resident of one State from his or her personal activities as an entertainer or sportsperson exercised in the other State may be taxed in that other State”.

This means that neither entertainers nor sportspeople are able to benefit from the 183-day exemption rule. There is also usually an anti-abuse provision, for cases in which a third party (such as a company formed for just such a purpose, and which might otherwise claim exemption from tax because it earns business profits but has no permanent establishment in the host country) receives the income in respect of the activities of the entertainer or sportsperson; it provides, according to the Revenue, that “protection cannot be claimed under Article 7 (Business Profits) where the entertainer or sportsperson has a right to participate in the profits of the person to which the income accrues”.

* Pensions and annuities arising in one contracting state, and paid with regard to employment to a resident in the other contracting state will usually only be taxable in the latter state.

* With regard to the avoidance of double taxation as a general principle, where both states have taxing rights on income or gains, the State of residence of the taxpayer will usually either exempt the income or gains from further taxation or grant a tax credit for the tax paid in the other State.

* Increasingly, provisions specifying situations in which information on the tax matters will be included in DTTs, (or separate tax information exchange agreements TIEAs will be put in place), although this is not always the case.