On November 27, 2018, Ireland’s Finance Minister Paschal Donohoe announced the details of a Competent Authority Agreement between Ireland and Malta (Agreement). The clear aim of the Agreement is to end what is referred to as the “Single Malt” tax structure.
Under Ireland’s domestic tax rules on corporate residence, a company incorporated in Ireland is treated as resident in Ireland for tax purposes unless that company is regarded for the purposes of a tax treaty as resident in a treaty partner jurisdiction and not resident in Ireland.
Under Maltese domestic tax rules on corporate residence, companies that are managed and controlled in Malta are considered tax resident in Malta regardless of incorporation. In addition, in certain circumstances, Maltese resident companies incorporated outside of Malta do not pay Maltese tax on income that is not received in Malta.
This gave rise to a situation whereby Irish incorporated companies that were managed and controlled in Malta and therefore tax resident in Malta for the purposes of the Ireland-Malta tax treaty could, in certain circumstances, receive income (such as royalties) outside of Malta without Maltese tax. As the relevant company was regarded for the purposes of the tax treaty as resident in Malta and not resident in Ireland, Ireland did not have a right to tax such income.
Effect of the Agreement
The Agreement will affect companies relying on the deeming provision in the residence article of the Article 4(3) of the Ireland-Malta tax treaty which, in a dual residence scenario, deems a company to be resident in one jurisdiction only.
In effect, the Agreement “turns off” this deeming provision in circumstances where there is no double tax to be mitigated and the arrangement gives rise to a risk of double non-taxation.
Where this provision applies, an Irish incorporated company can no longer be regarded under the tax treaty as resident in Malta and not resident in Ireland and will be viewed as Irish tax resident. The Agreement does not extend to Irish incorporated companies that are subject to tax in Malta.
The Agreement will come into effect for taxable periods beginning six months on the later of the dates that the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS MLI) enters into effect in Ireland (scheduled to be January 1, 2020) and the date that the BEPS MLI enters into effect in Malta.
Therefore, in the interim period between now and the entry into effect of the Agreement, Irish incorporated companies that are currently regarded as resident in Malta for the purposes of the tax treaty will need to consider what impact, if any, the terms of the Agreement may have on their tax residency profile.