The Irish Revenue has announced that the Convention between the Government of Ireland and the Government of the Islamic Republic of Pakistan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (Hereafter: the DTA) entered into force on October 11, 2016.
The fact that the DTA entered into force on October 11, 2016 means that based on Article 28, Paragraph 2 of the DTA (“ENTRY INTO FORCE”) the provisions of the DTA shall have effect:
(a) in the case of Ireland:
(i) with regard to income tax, universal social charge and capital gains tax, for any year of assessment beginning on or after January 1, 2017;
(ii) with regard to corporation tax, for any financial year beginning on or after January 1, 2017;
(b) in the case of Pakistan:
(i) with regard to taxes withheld at source, in respect of amounts paid or credited on or after July 1, 2017; and
(ii) with regard to other taxes, in respect of taxable years beginning on or after July 1, 2017.
The fact that the DTA enters into force also means that based on Article 28, Paragraph 3 the Convention between the Government of Ireland and the Government of the Islamic Republic of Pakistan for the Avoidance of Double Taxation with respect to Taxes on Income signed at Paris on 13 April 1973, (hereinafter referred to as "the 1973 Convention"), shall cease to have effect from the dates on which this Convention becomes effective in accordance with paragraph 2 of this Article.
Article 28, Paragraph 4 subsequently arranges that notwithstanding paragraph 3, where any provision of the 1973 Convention would have afforded any greater relief from tax than is due under this Convention, any such provision as aforesaid shall continue to have effect for
(a) a period of twelve months, and
(b) subject to paragraph 5, in the case of paragraphs 1 and 2 of Article XV of the 1973 Convention, for a period of 5 years
from the date on which the provisions of this Convention would otherwise have effect in accordance with the provisions of paragraph 2 of this Article.
Article 28, Paragraph 5 arranges that for the purposes of the application of subparagraph (b)(i) of paragraph 2 of Article XV of the 1973 Convention, the provisions of clauses (126D), (126E) and (133) of Part 1 of the Second Schedule to the Income Tax Ordinance 2001 shall apply in place of the provisions listed in that subparagraph.
Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“TAXES COVERED”), the existing taxes to which the Convention shall apply are in particular:
(a) in the case of Ireland:
(i) the income tax;
(ii) the universal social charge;
(iii) the corporation tax; and
(iv) the capital gains tax;
(b) in the case of Pakistan, the income tax;
Article 2, Paragraph 4 subsequently arranges that the DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes.
Residency
With respect to the residency of a person other than an individual, Article 4, Paragraph 3 of the DTA (“RESIDENT”) arranges that where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.
Permanent establishment
Article 5, Paragraph 3 of the DTA (“PERMANENT ESTABLISHMENT”) arranges that the term “permanent establishment” also encompasses a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than 6 months.
Article 5, Paragraph 6 of the DTA arranges that notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other Contacting State if it insures risks situated in the territory of that other State through a person other than an agent of an independent status to whom paragraph 7 applies.
With respect to the determination of the profits attributable to a permanent establishment Article 7, Paragraph 3 of the DTA (“BUSINESS PROFITS”) arranges the following:
(a) In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including only those executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.
(b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.
Immovable property
Article 6, Paragraph 1 of the DTA (“INCOME FROM IMMOVABLE PROPERTY”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
With respect to immovable property Article 13, Paragraph 1 of the DTA (“CAPITAL GAINS”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
Article 13, Paragraph 2 of the DTA subsequently arranges that gains from the alienation of shares, other than shares quoted on a stock exchange, of the capital stock of a company, or of an interest in a partnership, trust or estate, the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State. In particular:
(a) Nothing contained in this paragraph shall apply to a company, partnership, trust or estate, other than a company, partnership, trust or estate engaged in the business of management of immovable properties, the property of which consists directly or indirectly principally of immovable property used by such company, partnership, trust or estate in its business activities.
(b) For the purposes of this paragraph, "principally" in relation to ownership of immovable property means the value of such immovable property exceeding fifty per cent of the aggregate value of all assets owned by the company, partnership, trust or estate.
Associated enterprises
Article 9, Paragraph 2 of the DTA (“ASSOCIATED ENTERPRISES”) contains a so-called appropriate adjustment clause.
Dividends
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the DTA (“DIVIDENDS”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the share capital of the company paying the dividends;
(b) 10 per cent of the gross amount of the dividends in all other cases.
Article 10, Paragraph 5 subsequently arranges that where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.
Interest
If the beneficial owner of the interest is a resident of the other Contracting Party, Article 11, Paragraph 2 of the DTA (“INTEREST”) maximizes the withholding tax a Source State is allowed to withhold over such interest to 10 per cent of the gross amount of the interest.
Royalties
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12, Paragraph 2 of the DTA (“ROYALTIES AND FEES FOR TECHNICAL SERVICES”) maximizes the withholding tax a Source State is allowed to withhold over such royalties or fees for technical services to 10 per cent of the gross amount of the royalties or fees for technical services.
In Article 12, Paragraph 3, sub b fees for technical services are defined as follows:
“The term “fees for technical services” means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services) of this Convention.”
Other
Furthermore the DTA contains a.o. provisions regarding Offshore Activities (Article 22), regarding a Mutual Agreement Procedure (Article 25) and regarding the Exchange of Information (Article 26).
Click here to download the text of the DTA from the website of the Irish Revenue.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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