Contributing Firms:
Territorial Tax Regime
In its response to the Department of Finance’s Consultation on the introduction of a participation exemption(s) to the Irish corporation tax system the American Chamber of Commerce Ireland (AmCham) writes that it ‘believes it would be unwise to use the Irish domestic tax concept of ‘trading’ to frame access to the exemption’. Can you explain the concept of ‘trading’ in relation to the Irish tax code (which AmCham describes as ‘a concept which is largely unique to the Irish tax code relative to Ireland’s OECD counterparts’) and what impact would its use have for the effectiveness of Ireland’s move towards a territorial tax regime?

Collette Kenny, Director, Corporation Tax, Deloitte: In Ireland, for a company to avail of a 12.5% corporation tax rate, it must be carrying on a trade. Capital Gains Tax participation exemption also has a trading requirement in Ireland.
Colette Kenny
Colette Kenny

Whether or not a company is considered to be carrying on a trade is a question of fact. Irish tax legislation does not define the terms “trade” or “trading” (though it does state in section 3 TCA 1997 that “trade” includes every trade, manufacture, adventure or concern in the nature of trade). The term is quite broad and there is a significant body of case law and revenue practice which is relied upon when determining whether or not a company is trading. There is also guidance as to what constitutes “trading” from a set of rules known as the Badges of Trade.

In some cases, it is not clear whether a company would be regarded as trading for tax purposes and the analysis of trading versus non-trading activities, in particular to avail of participation exemption, can be complex. In addition, this concept of “trading” can be unfamiliar to taxpayers outside of Ireland and the UK.

From a competitiveness perspective, Ireland’s move to a territorial regime needs to be at a minimum aligned with other jurisdictions so that they are not at a disadvantage. The inclusion of a ‘trading’ requirement would complicate the new regime, leading to uncertainty for businesses which would be against the key objectives and reasoning for an introduction of a territorial regime.

This article appeared in the March 2024 edition of the Irish Tax Monitor.