The change, announced as part of Ireland's 2015 budget, will end a controversial corporate structure known as the 'double Irish' which companies have been accused of using for tax avoidance purposes. It will take effect from 1 January 2015 for newly-incorporated companies, and will apply from 2020 for companies with existing operations in Ireland.
Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said it was unlikely that the change would lead to a "flood of departures" of multinationals from Ireland.
"Arguably, the Irish incentives have done their job in creating investment and employment in the country," she said.
"With this announcement, the Irish government is taking the same approach that the UK took when it changed its residence rules in 1988, with a transitional period to 1993. The transitional period means that companies can await the outcome of the OECD's Base Erosion and Profit Shifting (BEPS) project before making major decisions," she said.
"Over the medium term, it will become ever-harder for very low tax structures to survive as BEPS and other measures begin to bite. The Irish corporation tax rate of 12.5% - which will be even lower if Ireland introduces 'patent box'-style tax breaks for innovation – may well be seen as a reasonable price to pay," she said.
In its 2015 budget document, the Irish government said that the country's company tax residence rules had "not kept pace with international tax developments". Although Ireland updated the rules last year to ensure that Irish-registered companies could not be 'stateless' in terms of their place of tax residency, Irish-registered companies whose place of central management and control is elsewhere have not automatically been tax resident in Ireland.
The difference between the Irish residency rules and those in place in other countries has allowed some large multinational companies to legally shift profits from Ireland to countries with lower rates of corporation tax, for example by having an Irish registered subsidiary make payments for using intellectual property to another Irish registered subsidiary which is tax resident elsewhere. This structure has been dubbed the 'double Irish' by commentators in the press.
Ireland already has a relatively low rate of corporation tax which is charged at 12.5% on traded income, including worldwide foreign branch income and foreign dividend income of resident companies; and at 25% on non-traded and investment income. According to the 2015 budget document, it will shortly consult on the introduction of a 'knowledge development box' income tax regime from 2015. The Irish government's 'Road map for Ireland's tax competitiveness' acknowledges that "EU and OECD rules on what will be acceptable competition in this area are not yet settled" but states that "following international trends in competitor jurisdictions, it is clear that making Ireland an attractive location for the development of intangible assets should be a priority"
The UK's 'patent box' regime allows companies to elect to apply a 10% rate of corporation tax to all profits earned from patented innovations and certain other IP rights. The European Commission is currently looking into the UK's patent box as part of a wider assessment of whether various tax regimes applicable to IP in the EU comply with EU rules on state aid. The OECD's recently-published work on 'harmful tax practices' could prohibit the arrangement, but the UK Treasury says that the measure does not facilitate profit shifting.
The Organisation for Economic Cooperation and Development (OECD) published the first recommendations as part of its BEPS project to reform international corporate tax rules last month. This work is aimed at ensuring that multinational companies are taxed in the same jurisdiction as their actual business activities take place and includes proposals to neutralise so-called 'hybrid mismatch' arrangements, prevent the abuse of tax treaties and reform transfer pricing rules. The OECD is expected to complete this work by the end of next year.