Ireland Income Tax Treaty
US Ireland income Tax Treaty : The United States has entered into several tax treaties with different countries across the globe — including Ireland . There are many US taxpayers who are originally from Ireland and/or still maintain offshore accounts, assets & investments and/or generate income from Ireland. The United States and Ireland entered into a tax treaty nearly 75-years ago. The purpose of the tax treaty is so Taxpayers can determine what their tax liability is for certain sources of taxable income. While the treaty is not the final word in how items of income will be taxed, it does help residents better understand how either the IRS and/or Ireland will tax certain sources of income – and whether or not the saving clause will further impact the outcome. Let’s review the basics of the United States-Ireland Income Tax Treaty – an how the income tax treaty between US and Ireland works.
In general, the default position is that a Taxpayer who is a US person such as a US Citizen, Legal Permanent Resident, or Foreign National who meets Substantial Presence Test is taxed on their worldwide income. This would also include income that is being generated in Ireland, and may be tax-free or exempt under the tax rules of Ireland — unless an exception, exclusion or limitation applies (such as with pension).
As we work through the United States-Republic of Ireland Tax Treaty, one important thing to keep in mind is the saving clause . The saving clause is inserted in tax treaties in order to limit the application of the treaty to certain residents/citizens. With the saving clause, each country retains the right to tax certain citizens and residents as they would otherwise tax under general tax principles in their respective countries — absent the tax treaty taking effect.
4. Notwithstanding any provision of the Convention, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect. For this purpose, the term “citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.
The provisions of paragraph 4 shall not affect:
a) the benefits conferred by a Contracting State under
paragraph 2 of Article 9 (Associated Enterprises),
paragraph 2 of Article 16 (Directors’ Fees),
paragraphs 1 (b) and 4 of Article 18 (Pensions, Social Security, Annuities, Alimony and Child Support), and
Articles 24 (Relief From Double Taxation), 25 (Non-Discrimination), and 26 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under
paragraph 5 of Article 18 (Pensions, Social Security, Annuities, Alimony and Child Support),
Articles 19 (Government Service), 20 (Students and Trainees) and
28 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.
The Saving Clause is inserted into a tax treaty in order to allow each country to reserve the right to tax citizens and residents the way that they would otherwise tax them had the treaty not been in effect. Despite the insertion of the saving clause into a tax treaty, there are exceptions to the saving clause as well —
For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term “permanent establishment” includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; and f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources.
3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
If a resident of one country has a Permanent Establishment (PE) in the other country, then that other country has the right to tax income generated from the Permanent Establishment within its borders. But, if there is no permanent establishment in place, then the mere fact that a non-permanent establishment generates income in the other country does not allow that other country to tax the income.
1. Income derived by a resident of a Contracting State from immovable property (real property) including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State.
2. The term immovable property (real property) shall have the meaning which it has under the law of the Contracting State in which the property in question is situated.
3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property.
4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.
This article provides that if income is earned by residents of one country, as a result of real property that is located in the other country — then it may be taxed in that other country. And, since it does not use the word shall, it presumes that either country may be able to tax the income. Still, foreign tax credits from a US perspective should avoid a US person from having to pay tax to both the United States and Ireland on the same income (although the foreign tax credit is not always a dollar-for-dollar credit).
1. Dividends paid by a company that is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, except as otherwise provided in this Article, the tax so charged shall not exceed:
a) 5 percent of the gross amount of the dividends if the beneficial owner is a company that owns at least 10 percent of the voting stock of the company paying the dividends;
b) 15 percent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.
When dividends are paid by a company of one country to a resident of that other country, then that other country has the opportunity to tax the income. Noting, that the first country (aka country of source) still gets the opportunity to tax the income — but may only tax the dividend income up to a certain tax rate not to exceed 15%.
1. Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State may be taxed only in that other State.
2. The term “interest” as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtors profits, and in particular, income from government securities and income from bonds or debentures, including premiums or prizes attaching to such securities, bonds, or debentures, and all other income that is treated as income from money lent by the taxation law of the Contracting State in which the income arises. Income dealt with in Article 10 (Dividends) and penalty charges for late payment shall not be regarded as interest for the purposes of this Article.
3. The provisions of paragraph 1 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base, situated therein, and the interest is attributable to such permanent establishment or fixed base in such case the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply.
Interest is a bit different than dividends from a taxation perspective — but oftentimes, the net-result is the same. The interest tax rules follow a residence-based concept, which means that if the interest is earned by resident of one country, then it will only be taxed in that one country — of course, there are exceptions, exclusions and limitations to be aware of as well. Noting, Interest is not exempted under paragraph five (5) article one (1) from the saving clause.
1. Gains derived by a resident of a Contracting State from the alienation of immovable property (real property) referred to in Article 4 (Income from Immovable Property (Real Property)) and situated in the other Contracting State may be taxed in that other State.
2. For the purposes of this Article, the term “immovable property (real property) referred to in Article 6 (Income from Immovable Property (Real Property)) and situated in the other Contracting State” shall include: a) in the United States, a United States real property interest; and b) in Ireland, shares (including stock and any security) other then shares quoted on a stock exchange, deriving the greater part of their value directly or indirectly from immovable property situated in Ireland.
3. Gains from the alienation of movable property that are attributable to a permanent establishment that an enterprise of a Contracting State has in the other Contracting State, or that are attributable to a fixed base that is available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, and gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or such a fixed base, may be taxed in that other State.
The capital gains rules provide that when gains are earned by a resident of one country as a result of alienating real property located in the other country — then the other country has the opportunity to tax the income. It is important to evaluate the definition of the term immovable property to determine whether that particular type of asset qualifies.
1. Income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio, or television artiste, or a musician, or as a sportsmen, from his personal activities as such exercised in the other Contracting State, which income would be exempt from tax in that other Contracting State under the provisions of Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services), may be taxed in that other State, except where the amount of the gross receipts derived by such entertainer or sportsman, including expenses reimbursed to his or borne on his behalf, from such activities does not exceed twenty thousand United States dollars ($20,000) or its equivalent in Irish pounds for the taxable year concerned.
2. Where income in respect of activities exercised by an entertainer or a sportsmen who is a resident of a Contracting State in his capacity as such accrues not to the entertainer or sportsman himself but to another person who is a resident of that State, that income of that other person, notwithstanding the provisions of Articles 7 (Business Profits) and 14 (Independent Personal Services), may be taxed in the Contracting State in which the activities of the entertainer or sportsman are exercised, unless it is established that neither the entertainer or sportsman nor persons related thereto participate directly or indirectly in the receipts or profits of that other person in any manner, including the receipt of deferred remuneration, bonuses, fees, dividends, partnership distributions, or other distributions.
This section provides that, subject to other sections, an artist or entertainer who is a resident of one country and provides entertainment services in the other country may be tax in the other country — although any income that is less than $20,000 in total is exempt; there are exceptions, exclusions and limitations.
1. a) Subject to the provisions or Article 19 (Government Service) pensions and other similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment shall be taxable only in that State; and
b) notwithstanding the provisions of Article 19, payments made by a Contracting State under provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State.
2. Annuities derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State. The term “annuities” as used in this paragraph means a stated sum paid periodically at stated times during a specified number of years, or for life, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).
Pensions are always an integral part of any tax treaty. Paragraph 18 provides that pension earned by resident of one country is only taxable in that country. But, when referring to Social Security payments and other public pensions, it is taxed by source, which means the country that is making the payment gets the opportunity to tax the income. A portion of the pension application is exempted from the Saving Clause.
a) Salaries wages and other similar remuneration other than a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.
b) However, such salaries, wages and other similar remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who:
i) is a national of that State; or
ii) did not become a resident of that State solely for the purpose of rendering the services.
W hen it comes to government service, it is important to note that if a person earns remuneration — including pensions as a result of working for the government — then those public funds are only taxable in that country.
1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income: a) the Irish tax paid by or on behalf of such citizen or resident; and b) in the case of a United States company owning at least 10 percent of the voting stock of a company which is a resident of Ireland and from which the United States company receives dividends, the Irish tax paid by or on behalf of the distributing company with respect to the profits out of which the dividends are paid.
2. For the purposes of paragraph 1, the amount of the credit less the amount of any excess paid by Ireland pursuant to paragraph 3 b) of Article 10 (Dividends) shall be treated as an income tax paid to Ireland by the beneficial owner of the dividend.
3. Where a United States citizen is a resident of Ireland: a) with respect to items of income that under the provisions of this Convention are exempt from United States tax or that are subject to a reduced rate of United States tax when derived by a resident of Ireland who is not a United States citizen, Ireland shall allow as a credit against Irish tax, only the tax paid, if any, that the United States may impose under the provisions of this Convention, other than taxes that may be imposed solely by reason of citizenship under the saving clause of paragraph 4 of Article 1 (General Scope); b) for purposes of computing United States tax on those items of income referred to in subparagraph a), the United States shall allow as a credit against United States tax the income tax paid to Ireland after the credit referred to in subparagraph a); the credit so allowed shall not reduce the portion of the United States tax that is creditable against the Irish tax in accordance with subparagraph a); and c) for the exclusive purpose of relieving double taxation in the United States under subparagraph b), items of income referred to in subparagraph a) shall be deemed to arise in Ireland to the extent necessary to avoid double taxation of such income under subparagraph b).
This is more of a general provision that provides that the purpose of the tax treaty is to avoid certain double taxation — and that subject to certain restrictions in the different articles, double taxation will prevent a person from being taxed twice on the same income.
1. The competent authorities of the Contracting States shall exchange such information as is relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes covered by the Convention insofar as the taxation thereunder is not contrary to the Convention, including the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes covered by the Convention.
The exchange of information is not restricted by Article 1 (General Scope). Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the Convention or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.
The exchange of information provision is designed to further enforce the fact that the purpose of the tax treaty is to promote cooperation and to facilitate any exchange of information necessary for each country to obtain the goals and objectives of being in a double taxation agreement with the other country.
When a US person has various Accounts, Assets or Investments in Ireland, they have to reported to the United States each year on various different forms depending on the value of and category of the assets/accounts.
Here are some common forms which may need to be filed:
The following is a summary of five (5) common international tax forms.
The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.
The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?
If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account ; rather, it is an annual aggregate total of the maximum balances of all the accounts .
This form is used to report “Specified Foreign Financial Assets.”
There are four main thresholds for individuals is as follows:
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).
As of now, there are nearly 2000 Foreign Financial Institutions, within Ireland that report US account holder information to the IRS. The FFI list can be found here:
What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR reporting, it may involve a much broader spectrum of assets and accounts, including:
The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).
As provided by the Agreement:
An agreement effective September 1, 1993, between the United States and Ireland improves Social Security protection for people who work or have worked in both countries. It helps many people who, without the agreement, would not be eligible for monthly retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings.
The agreement covers Social Security taxes (including the U.S. Medicare portion) and Social Security retirement, disability and survivors insurance benefits. It does not cover benefits under the U.S. Medicare program or the Supplemental Security Income program.
This document covers highlights of the agreement and explains how it may help you while you work and when you apply for benefits.
The United States has entered into 26 Totalization Agreements, including Ireland .
In conclusion, The US and Ireland tax treaty is a great source of information to help better understand how certain income may be taxed by either country depending on the source of income, the type of income and the residence of the taxpayer. The tax outcome may be changed depending on whether or not the savings clause impacts how tax rules will be applied for certain types of income.
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
