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On 3 October 2024, the Irish High Court issued an important judgment concerning the tax residency of a Delaware LLC under the US/Ireland Double Tax Treaty (DTA).
This case involved the ability of three Irish subsidiaries of a Delaware LLC to claim group loss relief under Section 411 of the Taxes Consolidation Act 1997.
The key question was whether the Delaware LLC was considered “liable to tax” and thus “resident” under Article 4 of the US/Ireland DTA, which would enable the subsidiaries to claim group relief.
The High Court’s decision ultimately denied this relief.
The appeal was brought by Susquehanna International Group Ltd and two other companies, which sought to claim group relief by arguing that their parent, a Delaware LLC, was tax resident in the US.
The Irish Revenue disagreed, asserting that the LLC was not a company for group relief purposes and was not tax resident in the US under the DTA.
The crux of the issue was that the LLC was a disregarded entity for US tax purposes, meaning it was not subject to tax at the entity level.
Instead, its members, including several S Corporations and individuals, were taxed on their share of the LLC’s income.
This complex ownership structure raised questions about whether the LLC could be considered a separate taxable entity eligible for group relief.
Initially, the Tax Appeals Commission ruled in favour of the taxpayer, finding that the LLC was a company for the purposes of group relief and that it was resident in the US under the DTA.
The Commissioner took a purposive interpretation of the DTA, arguing that even though the LLC was fiscally transparent, it could still be considered tax resident under Article 4.
This was based on the LLC’s perpetual succession under Delaware law, which made it a body corporate.
The Irish High Court, however, overturned the Tax Appeals Commission’s decision. The Court focused on two key issues:
This ruling underscores the importance of understanding the complexities of entity classification in international tax law.
The Court’s decision hinged on the fiscally transparent nature of the Delaware LLC, which ultimately deprived it of treaty benefits and group relief eligibility.
While the LLC was structured under US law as a disregarded entity, this classification proved crucial in the Irish Revenue’s denial of relief.
For businesses with similar structures, this judgment highlights the need to carefully examine ownership arrangements and the potential tax implications.
Companies with complex cross-border structures should ensure that their parent entities meet the residency requirements under relevant tax treaties to benefit from relief provisions like group loss relief.
The Irish High Court’s decision serves as a reminder of the challenges posed by hybrid entities in international tax law.
While the Tax Appeals Commission initially supported the taxpayer’s position, the High Court’s strict interpretation of the US/Ireland DTA ultimately led to the denial of group relief.
Businesses should take note of this ruling and review their structures to ensure compliance with tax residency rules.
If you have any queries about this article on Group Loss Relief and Delaware LLCs or tax matters in Ireland, then please get in touch.
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In a recent case, Denmark issued a ruling on the concept of Permanent Establishment (PE), which has important implications for businesses that operate across borders.
This ruling followed a case involving a Swedish company’s CEO working part-time in Denmark, raising questions about when a business is deemed to have a PE in a foreign country.
The ruling highlights the importance of understanding the concept of PE, as it can determine whether a company is liable to pay tax in a particular country.
Permanent Establishment refers to the situation where a business has a sufficient physical presence in a foreign country, making it liable to pay tax on its profits in that country.
PE can take many forms, such as having an office, factory, or even just a representative working in a foreign country.
The exact definition of PE can vary from one country to another, but the principle is the same: if a business is operating in a country for a certain period of time, it may be required to pay taxes there.
In this particular case, the CEO of a Swedish company was working part-time in Denmark, raising questions about whether the company had established a PE in Denmark.
The Danish tax authorities argued that the company had a PE in Denmark because the CEO was regularly conducting business activities in the country.
The company, however, claimed that the CEO’s presence in Denmark was not enough to constitute a PE.
The Danish court ultimately ruled that the company did have a PE in Denmark, as the CEO’s work in the country went beyond a mere temporary presence.
This ruling has important implications for businesses with employees who work remotely or travel frequently between countries.
The Danish ruling on Permanent Establishment serves as an important reminder for businesses operating internationally.
Companies need to carefully assess their operations in foreign countries to determine whether they have a PE and may be required to pay tax there.
The rise of remote work and cross-border business activities has made this issue more relevant than ever.
If you have any queries about this article on Denmark Permanent Establishment Rules, or tax matters in Denmark, then please get in touch.
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Amazon’s tax practices in the UK have been under the spotlight for many years, with criticism frequently aimed at the tech giant for its minimal corporation tax payments.
In recent years, Amazon paid very little in taxes due to the utilisation of a government tax break, which has now expired.
This development has led to Amazon paying corporation tax for the first time since 2020, marking a significant shift in both the company’s approach to tax and the broader UK tax policy landscape.
Amazon operates globally, with the UK being one of its key markets.
Historically, like many multinational companies, Amazon has faced criticism for taking advantage of legal tax avoidance strategies.
These strategies often involved reporting profits in low-tax jurisdictions such as Luxembourg, while paying relatively little tax in high-tax markets like the UK.
It is claimed that one of the main tools Amazon and other companies had been using in recent years to reduce their UK tax burden had been Rishi Sunak’s much vaunted “Super Deduction”.
The relief allowed for 130% corporation deduction for qualifying expenditure on qualifying plant and machinery in a two year period beginning in April 2021.
This change in Amazon’s tax payments also aligns with a global push for fairer taxation of multinational companies.
The OECD’s Pillar Two reforms, which aim to introduce a global minimum tax rate of 15%, have garnered widespread support.
These reforms are designed to stop companies from shifting profits to low-tax jurisdictions, ensuring that all multinationals, including tech giants like Amazon, contribute a fair share to the countries in which they generate significant revenue.
Amazon’s recent corporation tax payment in the UK is a reflection of both changes in UK tax policy and global efforts to reform corporate taxation.
With governments across the world, including the UK, pushing for greater tax transparency and compliance from large multinationals, we may see further shifts in how companies like Amazon structure their global tax strategies.
If you have any queries about this article on Amazon UK’s corporation tax, or tax matters in the UK, then please get in touch.
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Transfer pricing has always been a complex area for multinational companies, as it involves setting the prices for transactions between related entities in different countries.
The UK tax authority, HMRC, has recently issued new guidelines on transfer pricing risks, which have been hailed as a “game changer” by tax experts.
These guidelines aim to provide clearer guidance to businesses, helping them manage the risks associated with transfer pricing and avoid costly disputes.
Transfer pricing refers to the pricing of goods, services, and intellectual property that are traded between companies under common ownership.
For example, a UK-based subsidiary of a multinational company might buy raw materials from a related company in another country.
The price at which these goods are traded—known as the transfer price—needs to be set at an “arm’s length” rate, meaning it should be the same as if the transaction were between unrelated parties.
In practice, transfer pricing has been a contentious issue for tax authorities, as companies can manipulate these prices to shift profits to low-tax jurisdictions, thereby reducing their overall tax liability.
HMRC’s latest guidelines focus on identifying and addressing key transfer pricing risks.
These include areas such as the valuation of intangibles (e.g., patents and trademarks), the provision of management services, and the pricing of goods and services traded between related entities.
One of the main changes in these guidelines is HMRC’s focus on risk-based assessments.
This means that HMRC will be targeting businesses that they perceive to be high-risk, particularly those with complex supply chains or significant intangible assets.
By providing clearer guidance on what constitutes high-risk behaviour, HMRC hopes to encourage businesses to take a more proactive approach to transfer pricing compliance.
For multinational companies operating in the UK, these new guidelines represent both a challenge and an opportunity.
On the one hand, the guidelines place a greater burden on companies to ensure that their transfer pricing arrangements are compliant with UK tax law.
On the other hand, by providing clearer guidance, HMRC is helping companies to better understand the risks and avoid costly disputes.
For companies that have traditionally relied on aggressive transfer pricing strategies to minimise their tax bills, these guidelines could force a rethink.
HMRC’s emphasis on transparency and risk-based assessments means that companies will need to ensure that their transfer pricing policies are well-documented and justifiable.
HMRC’s new guidelines on transfer pricing risks are a significant development for multinational companies operating in the UK.
By providing clearer guidance on high-risk areas, HMRC is helping businesses to manage their transfer pricing risks and avoid disputes.
At the same time, these guidelines are likely to result in greater scrutiny of companies’ transfer pricing arrangements, particularly those with complex supply chains and intangible assets.
If you have any queries about this article on HMRC’s transfer pricing guidelines, or tax matters in the UK in general, then please get in touch.
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Controlled Foreign Company (CFC) rules are an important part of international taxation.
These rules are designed to prevent companies from using foreign subsidiaries in low-tax jurisdictions to avoid paying taxes in their home country.
The aim is to ensure that profits earned by these subsidiaries are taxed fairly, even if they are not immediately brought back to the parent company.
This guide will explain what CFC rules are, how they work, and why they matter in the context of international business.
CFC rules are regulations that prevent companies from using controlled foreign companies—subsidiaries located in countries with lower tax rates—to shift profits away from the higher-tax country where the parent company is based.
These rules ensure that even if profits are kept offshore, they are still taxed in the parent company’s home country.
A Controlled Foreign Company (CFC) is generally defined as a foreign corporation where more than 50% of its shares or voting rights are controlled by a resident or residents of the home country.
The main goal of CFC rules is to stop multinational companies from using tax havens or low-tax jurisdictions to reduce their tax burden.
Without these rules, companies could shift profits to subsidiaries in countries with little or no tax and avoid paying taxes in the countries where their real economic activities take place.
For example, without CFC rules, a company based in the UK could open a subsidiary in a low-tax country like Bermuda.
If the company shifted profits to that subsidiary, it would avoid paying UK taxes on those profits, even though the economic activity happened in the UK.
When CFC rules are in place, the home country’s tax authorities have the power to tax the profits of the foreign subsidiary even if the money is not brought back to the parent company.
These rules generally apply when the foreign subsidiary is located in a country with a lower tax rate than the home country.
Key factors that trigger the rules include:
1. Ownership: The parent company or its shareholders must control the foreign subsidiary (usually defined as owning more than 50% of the company).
2. Low-Tax Jurisdiction: the rules typically apply when the foreign subsidiary is located in a country with significantly lower tax rates than the parent company’s home country.
3. Passive Income: the rules often target subsidiaries that earn mainly passive income, such as interest, dividends, or royalties. Passive income is easier to shift between jurisdictions and is often the focus of tax avoidance strategies.
Let’s say a company called “GlobalTech Ltd.” is based in the UK but has a subsidiary in a low-tax country like the Cayman Islands.
The subsidiary is not engaged in much real business activity but generates significant passive income from investments.
Without CFC rules, GlobalTech could leave those profits in the Cayman Islands, paying very little or no tax.
However, under the UK’s CFC rules, the UK tax authorities would require GlobalTech to pay UK tax on those profits, as if they had been earned in the UK, preventing GlobalTech from benefiting from the lower tax rate in the Cayman Islands.
Not all foreign subsidiaries are subject to CFC rules. Many countries provide exemptions, especially if the foreign subsidiary is engaged in genuine business activities. Some common exemptions include:
These rules have become more important as international efforts to prevent tax avoidance have grown.
The OECD’s Base Erosion and Profit Shifting (BEPS) project has encouraged countries around the world to strengthen their CFC rules as part of a broader effort to tackle tax avoidance.
As a result, more countries are introducing or tightening CFC rules, making it harder for multinational companies to shift profits to low-tax jurisdictions.
The rules are a crucial part of the international tax system, preventing companies from shifting profits to low-tax jurisdictions.
They ensure that profits earned by foreign subsidiaries are fairly taxed in the parent company’s home country, even if those profits are not immediately repatriated.
If you have any queries about this article, or tax matters in your jurisdiction, then please get in touch.
Alternatively, if you are a tax adviser in your jurisdiction and would be interested in sharing your knowledge and becoming a tax native, then there is more information on membership here.
A “Permanent Establishment” (PE) is a concept used in international tax law to determine if a business must pay taxes in a foreign country.
It establishes the criteria for when a business has a taxable presence in a country where it operates, even if the company is based elsewhere.
Understanding PE is important for businesses operating across borders, as it directly impacts where and how much tax a company needs to pay.
This guide will explain what a PE is, why it matters, and how companies can ensure they are compliant with the rules. We will also provide a practical example to illustrate the concept.
In simple terms, a Permanent Establishment is a fixed place of business through which a company carries out its operations in a foreign country.
Once a company is deemed to have a PE in a country, it becomes liable to pay taxes on the profits generated in that country.
Most tax treaties and national laws follow a similar framework for defining PE. Generally, a business has a PE if:
The concept of PE is vital because it prevents businesses from avoiding taxes in countries where they are actively earning income.
Without these rules, companies could exploit loopholes, shifting profits to low-tax jurisdictions while generating revenue in high-tax countries.
The Organisation for Economic Co-operation and Development (OECD) guidelines on PE form the basis for many international tax treaties.
These rules ensure that businesses pay their fair share of tax in the countries where they have a real presence and carry out economic activities.
The determination of whether a company has a PE depends on several factors, including:
Imagine a company based in the UK, called “Tech Solutions Ltd.”, that sells software services to customers worldwide. Tech Solutions Ltd. has its main headquarters in London, but it wants to expand its customer base in Germany. To do so, it opens a small office in Berlin where local employees meet with clients and negotiate contracts.
In this case, Tech Solutions Ltd. has created a Permanent Establishment in Germany.
Here’s why:
As a result, Germany has the right to tax the profits that Tech Solutions Ltd. generates through its activities in the country.
The rise of remote work has added new complexities to the concept of PE.
For example, if an employee of a company works from home in a foreign country for an extended period, this could create a PE.
This was seen in a recent Danish case where a Swedish company’s CEO worked part-time in Denmark.
The Danish tax authorities argued that the CEO’s activities created a PE, as they were performing key business functions in Denmark, such as concluding contracts. The court agreed, establishing that the company had a taxable presence in Denmark.
Once a company is determined to have a PE in a foreign country, it must:
Failure to comply with PE rules can lead to significant penalties and legal disputes with tax authorities, as well as the possibility of double taxation if the company doesn’t have a treaty between the two countries to avoid this.
The concept of Permanent Establishment is crucial for any business with cross-border operations.
It ensures that businesses pay their fair share of taxes where they are economically active.
Understanding how and when a company creates a PE is essential for managing international tax risks and staying compliant with tax laws.
If you have any queries about this article on Permanent Establishment, or tax matters in your jurisdiction, then please get in touch.
Alternatively, if you are a tax adviser in your jurisdiction and would be interested in sharing your knowledge and becoming a tax native, then there is more information on membership here.
The ongoing battle over Digital Services Tax (DST) has put Ireland in a tough position.
With the European Union (EU) pushing for a tax on digital services provided by large tech companies, Ireland must decide where it stands—supporting the EU or maintaining strong ties with the United States, home to many of these tech giants.
The US government views these taxes as discriminatory because they primarily target American firms like Google, Facebook, and Amazon.
The DST is a tax levied on the revenues generated by large multinational digital companies that provide services such as social media, online advertising, and e-commerce platforms.
These taxes aim to address the gap where companies generate large revenues from countries where they have no physical presence, meaning they often pay minimal taxes.
The EU has been pushing for a 3% DST across its member states, with many countries already implementing it on a national level.
Ireland, as a key hub for US tech companies in Europe, finds itself at the heart of this debate.
Ireland is home to the European headquarters of major tech companies like Facebook, Google, and Apple (for our recent article on the EU’s ruling on Apple – see here).
These companies have set up in Ireland largely due to the country’s 12.5% corporate tax rate and other favourable tax policies.
The US has raised concerns that the DST unfairly targets American companies and could lead to retaliatory tariffs.
While the EU is keen on creating a unified DST, Ireland is balancing its economic dependence on the US tech sector with its obligations as an EU member.
Ireland’s decision will have significant consequences for its relationship with both the US and its EU partners.
Ireland faces a complex decision in the US-EU DST standoff. Its role as a tech hub makes it crucial to these discussions, and whatever path it chooses will shape its tax landscape for years to come.
If you have any queries about this article on Digital Services Tax, or tax matters in Ireland, then please get in touch.
Alternatively, if you are a tax adviser in Ireland and would be interested in sharing your knowledge and becoming a tax native, then please get in touch. There is more information on membership here.
The US Congress is set to reconvene to discuss key international tax policies, including the future of the Global Intangible Low-Taxed Income (GILTI) regime and its alignment with the OECD’s Pillar Two framework.
These discussions are expected to have a significant impact on multinational corporations that have operations abroad.
The Global Intangible Low-Taxed Income (GILTI) regime was introduced as part of the Tax Cuts and Jobs Act 2017 to prevent companies from shifting profits to low-tax jurisdictions.
Under GILTI, US multinationals must pay a minimum tax on their foreign income, even if that income is earned in countries with lower tax rates.
However, with the OECD’s Pillar Two framework setting a global minimum tax rate of 15%, the US Congress will need to decide whether to align GILTI with these new global standards.
During the upcoming session, Congress will focus on:
The decisions made during these discussions will have far-reaching consequences for US companies that operate abroad. If the GILTI regime is brought in line with OECD standards, some companies could see their tax liabilities increase. At the same time, aligning with global standards is essential for maintaining the US’s position in the international tax landscape.
The US Congress’s upcoming discussions on GILTI and international tax reform will shape the future of cross-border taxation for American companies.
These talks are part of a broader global trend towards ensuring that all companies pay a fair share of tax on their global profits.
If you have any queries about this article on GILTI or tax matters in the US, then please get in touch.
Alternatively, if you are a tax adviser in the US and would be interested in sharing your knowledge and becoming a tax native, then please get in touch. There is more information on membership here.
A dispute is brewing between the United States and Canada over the latter’s plans to introduce a Digital Services Tax (DST).
The DST is aimed at taxing large technology companies that generate significant revenue from Canadian users but currently pay little tax in the country.
The U.S. has expressed concerns that the tax unfairly targets American companies like Google, Facebook, and Amazon, and has threatened to retaliate with tariffs on Canadian goods if the DST is implemented.
In this article, we’ll explore the details of the DST, why the US is opposed to it, and what this could mean for international trade relations.
The Digital Services Tax is a tax on the revenue that large tech companies earn from providing digital services, such as social media, online advertising, and e-commerce platforms.
Canada’s proposed DST would impose a 3% tax on the revenue these companies generate from Canadian users.
The tax would apply to companies with global revenues of more than CAD 1 billion and at least CAD 40 million in Canadian revenue.
The tax is designed to ensure that digital companies, many of which are based in the U.S., pay a fair share of tax on the profits they earn from Canadian users.
Currently, many of these companies can shift their profits to low-tax jurisdictions, allowing them to avoid paying significant taxes in Canada.
The United States has raised concerns that the DST unfairly targets American tech companies, which dominate the global digital economy.
The U.S. government argues that the tax is discriminatory because it primarily affects American companies like Google, Amazon, and Facebook, while Canadian companies and companies from other countries are largely unaffected.
In response to Canada’s plans, the U.S. has threatened to impose tariffs on Canadian exports, which could affect key industries such as aluminum, steel, and agriculture.
The U.S. has argued that international tax issues should be addressed through multilateral agreements, such as the OECD’s global tax framework, rather than unilateral measures like the DST.
The dispute between the U.S. and Canada is ongoing, and both sides are still in talks to resolve the issue.
However, if Canada moves forward with the DST, the U.S. could retaliate with tariffs, leading to a potential trade war between the two countries.
This would have significant economic consequences for both countries, particularly for Canadian exporters who rely on the U.S. market.
In the meantime, many other countries, including France and Italy, have also introduced digital services taxes, and the US has taken a similar stance against those measures.
The outcome of the US-Canada dispute could have broader implications for how digital companies are taxed around the world.
Canada’s proposed Digital Services Tax has sparked a heated dispute with the United States, which views the tax as unfairly targeting American tech companies.
While the two countries continue to negotiate, the potential for tariffs and trade retaliation looms large.
If you have any queries about this article on Canada’s Digital Services Tax, or tax matters in Canada or the United States, then please get in touch.
Alternatively, if you are a tax adviser in Canada or the United States and would be interested in sharing your knowledge and becoming a tax native, then please get in touch. There is more information on membership here.
On 1 September 2024, the Kingdom of Bahrain made a significant move by publishing Decree-Law No. (11) of 2024, which introduces the Domestic Minimum Top-up Tax (DMTT) for large multinational enterprises (MNEs).
This new law applies to multinationals with a global annual revenue exceeding €750 million and marks a major shift in Bahrain’s tax landscape, particularly as the country has not previously imposed a corporate income tax on businesses.
The DMTT will come into effect on 1 January 2025, and companies affected by this law must register with the National Bureau for Revenue of Bahrain.
While the specific regulations and procedures are still pending publication, it’s clear that non-compliance will have serious consequences.
The introduction of the DMTT aligns with Bahrain’s commitment to the Organization for Economic Co-operation and Development (OECD) and its global two-pillar tax reform initiative (Pillar 2).
This initiative has been endorsed by the Gulf Cooperation Council (GCC) and over 140 countries worldwide.
Pillar 2 of the OECD’s reform is designed to ensure that large multinational companies pay a minimum level of tax on the profits they earn across the globe, regardless of the jurisdiction in which they operate.
This initiative is part of a broader effort to combat base erosion and profit shifting (BEPS), where companies shift profits to low-tax jurisdictions to avoid paying taxes.
The penalties for failing to comply with the DMTT are severe. According to Article 35 of Decree-Law No. (11) of 2024, any failure to register for tax purposes will be classified as tax evasion, which is a criminal offence in Bahrain.
The punishments include:
Companies must take this seriously to avoid these harsh penalties. The law’s strict penalties are intended to ensure that multinationals comply fully with the new tax rules.
What makes this move particularly interesting is that Bahrain has not yet introduced a corporate tax on the profits of companies based in the country.
This makes Bahrain the only GCC state without a regular corporate income tax.
However, by introducing the DMTT, Bahrain becomes the first GCC country to implement a tax regime in line with Pillar 2 of the OECD’s global tax framework.
This sets Bahrain apart from its neighbours and could be a signal that change is coming for other countries in the region.
For now, it appears that companies that fall below the €750 million revenue threshold will continue to benefit from Bahrain’s zero-corporate-tax policy.
However, it remains to be seen how long this situation will continue, especially given the global push towards greater tax fairness and transparency.
The introduction of the Domestic Minimum Top-up Tax is a landmark shift for Bahrain and a clear indication that the country is committed to playing its part in the global tax reform movement.
While Bahrain has traditionally been a tax haven for multinational companies, this new law shows that it is adapting to the changing global tax environment.
Large multinational enterprises should prepare to comply with the new rules and ensure that they register with the National Bureau for Revenue to avoid hefty penalties.
As Bahrain takes this step, it will be interesting to watch how the country’s tax policies evolve in the future and whether other GCC countries follow suit.
If you have any queries on this article about Bahrain Introduces Domestic Minimum Top-up Tax, or other tax matters in the GCC, then please get in touch.