Using the Irish/US Double Taxation Treaty for Royalty Flow Planning by Charles A. Cain
Where is the Source of Income?
US withholding tax is currently 30%, and is applied to the repayment of income streams from the USA to non-resident alien individual entities, unless there is an applicable Double Tax Treaty to reduce this amount.
The USA takes the view that an income stream with its source in the USA does not cease to have its source in the USA merely because it is led through conduit entities into other countries.
Thus an interest flow derived from the USA that is passed through a bank in, say, the Cayman Islands on a back to back basis continues to have a US source. Indeed, if the interest flow is paid into a Cayman Islands bank, and then an identical amount flows out of the Cayman Islands bank, the IRS takes the view that there have been two distributions of the same income flow, and thus two deductions of withholding tax are applicable.
In order to avoid this, it is essential that any income flow ceases in the country where it is received, and any further payment of money is characterised entirely differently. Furthermore, the transaction giving rise to such change in character must also have a genuine commercial character, and not simply be a ruse.
Double-Tax Treaties ? The US/Irish Treaty
Over the last two decades, the USA has consistently re-negotiated its treaties, so as to exclude such treaties from use by non-residents of either signatory country, thereby defeating so-called “treaty shopping”, where a resident of one country deliberately routes income streams through another country with an appropriate double tax treaty.
There are now effectively no old Treaties available for Double Tax Treaty planning, one of the last of the old treaties to be re-negotiated was the Ireland/US Treaty. The new Irish/US treaty does, however, lend itself to planning for Royalty flows. In the new Ireland/US Treaty
i. The term “person” includes an individual, estate, trust, partnership, company, and any other body of persons. (Act 3, C1 1(a)).
ii. Dividends are liable to withholding tax of 5% if the beneficial owner is a company that owns at least 10% of the voting stock of the company paying the dividends, or 15% in all other cases (Art 10.)iii. Interest has a zero withholding tax. The term ?interest? 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 debtor?s profits. Dividends are not interest, interest in excess of an arm?s length rate is excluded. (Art 11.)iv. Royalties have a zero withholding tax. ?Royalties? means payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic, or scientific work (including cinematographic films, and audio and video tapes and disks), any patent trademark, design or model, plan, secret formula or process or other like right or property, of for information concerning industrial, commercial or scientific experience; and gains derived from the alienation of any property described above provided that such gains are contingent on the productivity, use or disposition of the property. Royalties in excess of an arm?s length rate are excluded (Art 12.)v. There is a Limitation on Benefits Article 23 of importance. This states that a resident of Ireland shall be entitled to the benefits of the treaty only if such resident is a ?qualified person?. A resident of Ireland is a qualified person if such resident is