Employers of U.S. residents who are remaining in Europe while projects are shut down because of the COVID-19 pandemic might benefit from a new taxpayer-friendly approach. The new protocol forgives days spent abroad because of COVID-19 travel restrictions, as part of a foreign-country corporate residency analysis.
On March 23, 2020, the Irish Revenue Commissioners (Irish Revenue) issued Revenue eBrief No. 46/20, which announced Irish Revenue will adopt a taxpayer-friendly approach to corporate residency determinations for companies whose employees, directors, service providers, and/or agents are unable to travel as a result of recent government-imposed travel restrictions. This guidance came at the same time as similar announcements by the Organization for Economic Cooperation and Development (OECD) and several other countries. In particular, on May 20, 2020, and May 25, 2020, France and Germany, respectively, announced bilateral agreements with neighboring countries to ignore the presence of employees who must work outside of their country of employment due to government-imposed travel restrictions. Taken together, these policies suggest a universal willingness among international taxing authorities to quickly respond to the COVID-19 crisis and accommodate taxpayers as they navigate the evolving commercial realities of their businesses.
Determining a Company’s Country of Tax Residence Under Irish Law
In general, corporate tax residency under Irish law is determined based on (i) place of incorporation (for companies incorporated in Ireland on or after January 1, 2105), and (ii) place of central management and control. The primary factors utilized in determining a company’s place of effective management include the country where board meetings are held and the location of key directors and executives. If an Irish resident company is also treated as a tax resident in a different country under the provisions of a double tax treaty between Ireland and that other country, the applicable treaty tie-breaker residency rules will control.
A company that is tax resident in a country is generally subject to corporate income tax in that country with respect to its worldwide income. Companies are often incentivized to be treated as Irish tax residents due to Ireland’s lower corporate income tax rate on active business income (i.e., 12.5% on qualified trading income). Accordingly, certain companies may be concerned that their place of effective management has been involuntarily shifted away from Ireland as a result of employees and key members of management being unable to travel to Ireland for board meetings and other board activities due to recent COVID-19 travel restrictions, which could adversely impact their global effective tax rates.
Irish Corporate Tax Residency in the Era of COVID-19
In response to the current unprecedented situation facing taxpayers, Irish Revenue released a bulletin detailing Ireland’s approach to corporate tax residency determinations in light of the COVID-19 crisis. The guidance states that where an employee, director, service provider, or agent is present in Ireland as a result from COVID-19 related travel restrictions, Irish Revenue will be prepared to disregard such presence for corporate tax purposes. Additionally, where an employee, director, service provider or agent is present outside of Ireland as a result of COVID-19 related travel restrictions, Irish Revenue will be prepared to disregard such presence for corporate tax purposes.
This guidance is good news for companies whose employees are stranded or otherwise unable to travel to Ireland for board meetings or other key management decisions. Those businesses with Irish tax residency concerns should maintain records supporting a bona fide relevant presence within or outside of Ireland, as appropriate, to provide to Irish Revenue as evidence that such presence resulted from travel restrictions. However, Ireland has yet to announce any bilateral agreements to disregard the presence of workers employed by an Irish company who must work outside of Ireland as a result of the COVID-19 crisis. Taxpayers should continue to monitor guidance from other relevant countries regarding corporate residency determinations.
How Can Venable Help?
Travel restrictions related to the COVID-19 crisis are expected to significantly impact the operating models and tax footprints of many international taxpayers. Venable’s International Tax team can help clients understand the complex rules related to corporate tax residency and develop tax planning strategies to proactively address the changing commercial landscape.