RCT for Non-Resident Companies

RCT is a withholding tax that applies to payments made by principal contractors to sub-contractors under relevant contracts, being contracts for the provision of construction operations for the purposes of this article. Where RCT applies to a contract, any payments made under the contract must be notified to Revenue before the payment is made by way of the eRCT system, with Revenue then instantly confirming the withholding tax rate to be applied to the payment. There are three withholding tax rates: 0%, 20% and 35%.

• The 0% rate applies to sub-contractors who are registered for RCT and have demonstrated a strong compliance record over the previous three-year period.
• The 20% rate is the default rate awarded to newly registered companies and applies to sub-contractors who are registered for RCT and have their tax affairs in order but do not satisfy the requirements to be awarded the 0% rate, e.g. by not having three years of compliance history.
• The 35% rate applies to sub-contractors who are not registered for RCT or who do not satisfy the criteria to avail of the 20% rate, e.g. by not having their tax affairs in order. 

Revenue has the ability to amend a sub-contractor’s RCT rate if they do not maintain their tax affairs. For example, an outstanding VAT return or liability may cause a sub-contractor’s RCT rate to be increased from 0% to 20% or from 20% to 35% until such time that their tax affairs are brought back up to date.

Any RCT withheld is ultimately refundable to the sub-contractor or available as a credit against their corporation tax liability if they are required to file an Irish corporation tax return.

The main goal of the RCT system is to ensure that companies, both resident and non-resident, comply with their Irish tax obligations by increasing the level of insight that Revenue has into their tax affairs. Refund applications typically involve providing Revenue with details of how projects were serviced, i.e. through sub-contractors or employees.

There is no additional cost to a principal contractor operating the RCT system correctly, but the penalties for non-compliance are severe and can have a significant impact on a principal contractor’s profitability. The applicable penalties, outlined below, are based on the sub-contractor’s RCT position at the time that the payment giving rise to non-compliance was made:

• A 3% penalty applies where the sub-contractor was subject to the 0% rate.
• A 10% penalty applies where the sub-contractor was subject to the 20% rate.
• A 20% penalty applies where the sub-contractor was subject to the 35% rate.
• A 35% penalty applies where the sub-contractor was not known to Revenue, i.e. not registered for tax.

Revenue has the ability to mitigate the level of penalties applicable on a case-by-case basis under s1065 TCA 1997.

As noted above, RCT applies to payments made under relevant contracts, being contracts for the provision of construction operations. This may suggest a relatively limited scope, but the definition of “construction operations” for RCT purposes is much broader than the traditional meaning of construction. Section 530(1) TCA 1997 defines construction operations as including:

1. “The construction, alteration, repair, extension, demolition or dismantling of buildings or structures,

2.  The construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land,

3. The installation, alteration or repair in any building or structure of systems of heating, lighting, air-conditioning, soundproofing, ventilation, power supply, drainage, sanitation, water supply, or burglar or fire protection,

4. The installation, alteration or repair in or on any building or structure of systems of telecommunications, and

5. The external cleaning of buildings (excluding routine maintenance) or the internal cleaning of buildings and structures, in so far as it is carried out in the course of their construction, alteration, extension, repair or restoration.”

In many cases it will be easy to identify that a contract falls within the scope of RCT, but other items will require a more in-depth review. For example, it should be reasonably obvious that a sub-contractor engaged by a principal contractor to build a house will be performing construction operations, but the question of whether a sub-contractor is performing construction operations in relation to a system of heating or telecommunications may be more difficult to answer.

Revenue’s Tax and Duty Manual Part 18-02-01, “Relevant Contracts Tax: Relevant Operations”, provides additional information in relation to these items to assist in making a determination, such as clarifying that works will be considered relevant operations in relation to systems only where the work relates to the system itself; for example, the installation of a heating system will fall within scope, as would a repair to that system, but adding an item to a system where the item is not capable of being considered a system in and of itself would not fall within scope, nor would, assumably, the associated repair of that item.

It is also important to note that the above RCT provisions apply only where the party engaging the contractor to perform the work is considered a principal contractor for RCT purposes. Under s530A(1)(b) TCA 1997 a principal contractor includes a company or an individual who is carrying on a business that includes the erection of buildings or the development of land. However, the meaning is extended under s530A(1)(a) to any individual or company who is a contractor under a relevant contract, meaning that a sub-contractor who would not be considered a principal contractor as they do not carry on a land development business would still be considered a principal contractor if their services are subject to RCT.

Section 530(1) TCA 1997 also includes a catch-all provision that essentially broadens the scope of RCT to capture more or less any element of an overall construction operation. The section outlines that operations that form an integral part of, or are preparatory to, or are for rendering complete of any of the operations defined in s530(1)(a)–(d) TCA 1997 will be considered construction operations. This effectively means that even if a service is not specifically defined as being subject to RCT, if it is an integral aspect of a larger contract that is subject to RCT, it will still fall within scope.

The impact of this catch-all provision is broad in that sub-contractors engaging sub-contractors of their own need to consider not only whether the specific service to be provided by the sub-contractor is a construction operation but they also whether the service would be integral to a larger contract within the scope of RCT.

It should be noted that RCT applies regardless of the residence status of the sub-contractor or the principal contractor – if the work is carried out in Ireland and is considered a relevant operation, RCT will apply.

Before considering the cash-flow implications of RCT’s applying to a contract and the common pitfalls faced by non-resident contractors, this article briefly considers the VAT implications of RCT’s applying to a contract, as well as the corporation tax and employer PAYE/PRSI implications of having a construction-type project in Ireland.

For VAT purposes, s16(3)(b) VATCA 2010 outlines that where a principal contractor receives services that are subject to RCT, that contractor is required to self-account for the Irish VAT arising on the supply on the reverse-charge basis. This simplifies the tax registration requirements for sub-contractors who do not otherwise have a requirement or need to register for Irish VAT in situations where that sub-contractor does not engage sub-contractors of their own and also minimises the cash-flow impact of the VAT cost for the principal contractor. Care should be taken by sub-contractors to ensure that they are satisfied that the conditions outlined in s16(3)(b) are met before issuing an invoice applying the reverse-charge mechanism.

Although the VAT reverse-charge mechanism is directly linked to the definition of construction operations, the considerations for corporation tax and employer PAYE/PRSI purposes are not. However, both taxes will, nonetheless, be a consideration in the majority of scenarios where RCT applies to a contract.

For corporation tax purposes, Article 5 of the OECD Model Tax Convention provides that a permanent establishment (PE) will be created where a building site, construction project or installation project lasts longer than 12 months. The majority of Ireland’s double taxation agreements (DTAs) include this PE clause, although, notably, the DTA between Ireland and the United Kingdom provides for a reduced period of six months.

This may not be a consideration in some circumstances, as groups may choose to incorporate an Irish-resident company to service their Irish projects. However, a non-resident company may create a corporation tax presence in Ireland in a reasonably short period of time, which will increase compliance obligations, impact the timing and method of claiming a refund of RCT suffered and have a knock-on impact on the applicability of employer PAYE/PRSI to any employees who are used to service the Irish projects.

From an employer PAYE/PRSI perspective, Tax and Duty Manual Part 42-04-65, “Employee Payroll Tax Deductions in Relation to Non-Irish Employments Exercised in the State”, confirms that Revenue will not require a non-resident employer to operate Irish payroll taxes in respect of a foreign contract of employment in circumstances where the employee is present in Ireland for 30 workdays or fewer in a tax year. Similarly, Revenue will not require payroll taxes to be operated where the employee is present in Ireland for 60 workdays or fewer and satisfies the criteria outlined in the employment article of the relevant DTA. For reference, Article 15(2) of the OECD Model Tax Convention (which deals with income tax and not payroll taxes) provides the following criteria:

• the recipient is present in Ireland for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the fiscal year concerned;
• the remuneration is paid by, or on behalf of, an employer who is not a resident of Ireland; and
• the remuneration is not borne by a permanent establishment which the employer has in Ireland. 

It should be noted that the employment article of each specific DTA would need to be considered on a case-by-case basis in relation to the above criteria. However, it is clear that the question of whether a company has a PE in Ireland has a direct impact on the applicability of payroll taxes.

Although it may be possible to obtain a dispensation order in respect of employees’ exceeding 60 workdays for companies with no PE or 30 workdays for those companies with a PE, there will, naturally, be scenarios where payroll taxes will need to be applied in Ireland.

For commercial purposes, the main impact of RCT’s applying to a contract will be cash-flow.

A non-resident company with no PE and no other Irish tax liabilities must make an application for a refund of RCT suffered, which can take several months to process. Before making the application to Revenue, a Form IC3 must be stamped by the tax authorities in the sub-contractor’s country of residence certifying that they were tax resident in that jurisdiction for the period covered by the RCT deductions.

Where a non-resident company has created a PE, it is entitled to a refund of the RCT suffered only once its corporation tax return for the financial year is filed with Revenue and after Revenue is satisfied that no other tax liabilities arise in respect of VAT or employer PAYE/PRSI. This can increase the timeframe for repayment significantly – if RCT is withheld in the first month of an accounting period and the corporation tax return is not filed until the filing deadline, there would be a minimum of 21 months before the RCT is repaid, which assumes that additional information is not sought by Revenue.

There is one element of relief for companies that have sub-contractors of their own who are subject to RCT at a rate other than 0% or that generally have VAT or employer PAYE/PRSI liabilities, in that Revenue will allow offsets of RCT suffered against the liabilities arising under those tax heads. This will reduce the cash-flow impact for some companies but will not be of any benefit if the entity is the ultimate end sub-contractor with no other tax liabilities or if it is in the middle of a supply chain with a sub-contractor subject to the 0% rate of RCT.

Section 530G TCA 1997 sets out the criteria that must be satisfied before a company, whether resident or non-resident, can qualify for the 0% rate of RCT. In short, the criteria include:

• having an ongoing relevant contract;
• trading from a fixed place established in a permanent building with such equipment, stock and other facilities as are required for the business (in Revenue’s opinion);
• maintaining business records;
• having a three-year history of strong compliance;
• if non-resident during the previous three years, having a comparable compliance record in the country of residence (as evidenced); and
• evidencing that all directors of the company, along with shareholders with a beneficial ownership of 15% or more of the ordinary share capital of the company, have a three-year strong compliance record or an equivalent in their country of residence if non-resident.

The above would suggest that there are no circumstances in which a newly incorporated company or a newly tax-registered non-resident company could obtain the 0% RCT rate. However, s530G(3) TCA 1997 allows Revenue to disregard any of the requirements if a company satisfies Revenue that the requirement should be disregarded.

Naturally, the ability to disregard a requirement is open-ended, and Revenue retains a contra ability under s530G(2)(d) TCA 1997 to refuse the 0% rate even where all other conditions are satisfied if it believes that the taxpayer is unlikely to maintain a strong compliance record in the future.

It is possible for a non-resident company to make an application to Revenue under s530G(3) to have its RCT rate reduced to 0% within the first three years of trading in Ireland. However, given the open-ended nature of s530G(3), there is no guarantee that any application would be successful.

Naturally, the most common pitfall encountered by non-resident companies in respect of RCT is a general lack of awareness of the scheme’s existence and subsequent non-application of RCT on payments to subcontractors. However, even in cases where non-resident companies have a degree of familiarity with the operation of RCT, there are specific areas which can cause issues.

As noted above, under s530A(1)(a) TCA 1997 a company is considered a principal contractor if it is the contractor under a relevant contract. Coupled with the catch-all provision in s530(1)(e) TCA 1997, this means that companies that are engaging sub-contractors on works that would, in and of themselves, fall outside the scope of RCT can find themselves with a requirement to operate RCT.

An example of this is where a cleaning company is engaged by a developer to clean the interior of a residential premises after its completion and to remove all waste. As part of the waste removal the cleaning company hires a skip from a third party. The contract between the developer and the cleaning company would clearly be a relevant contract under s530(d) TCA 1997. Although the cleaning company could not be considered to be carrying on a business of erecting buildings or developing land, it would, nonetheless, be considered a principal contractor by virtue of s530A(1)(a). Skip hire does not fall within any of the specific definitions of construction operations but would fall within scope of the catch-all provision in s530(1)(e) as it is necessary to render the cleaning operation complete. The cleaning company would therefore be required to operate RCT on the payment to the skip hire company.

The catch-all provision also brings plant hire into scope where the plant is provided with an operator.

When considering whether a contract is subject to RCT, it is extremely important to take the context of the overall project into account rather than look purely at the service being provided.

RCT applies to payments made under relevant contracts, as opposed to payments for relevant operations (being construction operations). This is an important distinction – the legislation has the effect of making payments made under relevant contracts subject to RCT without differentiating regarding whether the payment relates to a relevant operation or a non-relevant operation.

The simple impact of this distinction is that if any part of a contract falls within the scope of RCT, the entire contract is within its scope. An example of this is a contract for repairs and maintenance. Although routine maintenance is not a construction operation within the meaning of s530(1) TCA 1997, repairs are considered construction operations. With that said, a payment for maintenance works made under a contract for repairs and maintenance would be subject to RCT, notwithstanding the fact that maintenance is specifically excluded from the scope of the scheme.

This applies similarly to supply-and-install contracts. If the installation aspect is subject to RCT, then the provision of the goods will also be subject to RCT, even though the supply of goods is not mentioned specifically in the legislation.

The application of RCT to goods can have disastrous consequences, particularly for UK-based companies that are permitted to disregard the goods element of a payment when applying the UK equivalent of RCT.

Given the above, it is vital that sub-contractors consider the implications of the contracts into which they are entering to ensure that significant cash-flow issues are not encountered based on a minor element of a contract. Consideration should be given to whether it is possible to separate from each other the aspects of the contract that do and do not fall within scope to minimise the applicability of RCT.

This may work in some scenarios and not others and will need to be considered on a case-by-case basis. For example, it would not be uncommon for a company to enter into a maintenance-only contract, with any repair works to be agreed in advance under a separate agreement. However, a supply-and-install contract could not reasonably be split into two separate elements and would likely give rise to unintended VAT consequences also. The same could be said for the leasing of specialist plant with an operator – it would not make commercial sense for these two items to be agreed under separate contracts as no company would agree to lease specialist plant if it was not guaranteed that it would have access to an individual who could operate the plant.

In situations where contracts are split artificially they are likely to be treated as one contract subject to RCT.

Principal contractors will need to satisfy themselves when making a payment under a contract regarding whether any element of the contract falls within scope and, for the reasons noted above, should pay close attention to any situations where services to be provided by sub-contractors are to be agreed under separate contracts. Ultimately, the principal contractor will be liable for any penalties arising for non-application of RCT.

There is no concept of group relief for RCT purposes, which means that payments made by a company to its 100% parent company or a sister company will still be subject to RCT. For established Irish groups with strong compliance records this creates an additional administrative step but does not create any cash-flow issues within the group.

For international groups, however, poor planning can lead to significant unintended consequences for multiple group members. For example: 

• A UK-based construction company secures a two-year contract for construction operations in Ireland.
• Rather than registering itself for Irish taxes, the UK company establishes an Irish subsidiary that will enter into the contract with the customer. The main driver for setting up the Irish company is risk segregation, but there is also an appetite to avail of the 12.5% corporation tax rate on the Irish profits.
• The UK company has a strong, specialised employee base, which will ultimately work in Ireland on the projects for significant periods of time.
• The UK company also has good relationships with a number of specialist sub-contractors, who will be needed on the Irish project. It has been agreed that the UK company will continue to process payments to the sub-contractors under the UK equivalent of the RCT system for the Irish works.
• The UK company raises an overall management fee to the Irish company at the end of the two-year project to recover the costs incurred on wages and salaries of the employees working in Ireland (who continued to be paid through UK payroll), as well as the sub-contractors and an allocation of head office costs, such as accountancy fees and management salaries.
• The Irish company pays the UK company without deduction of RCT as the payment relates to a management fee rather than construction operations.
• The customer operates RCT at a rate of 20% on payments to the Irish company.

In this case, even though the Irish company is paying a management charge, the underlying services are for relevant operations, and therefore, the entire management charge (including the head office costs) would be within the scope of RCT. If the UK company is not registered for RCT, the Irish company would be subject to a penalty of 35% on the payments made to the UK company.

The implications for the UK company would be significantly worse:

• The payments made to the UK sub-contractors were for relevant operations, and the UK company should have operated RCT on the payments rather than the UK equivalent. The UK company would be subject to a penalty of 35% on the payments made to the sub-contractors.
• Given the length of the project, it is likely that the UK company would be considered to have an Irish PE. It would be required to register for corporation tax and file an Irish corporation tax return to remit the corporation tax payable on Irish profits generated.
• Given that a PE exists and the UK employees were paid through UK payroll, there is likely an Irish employer PAYE/PRSI exposure unless all employees were present in Ireland for 30 workdays or fewer in both years.

The combination of RCT penalties (which are effectively a double hit), likely employer PAYE/PRSI liabilities and the administrative cost of registering the UK company for Irish taxes while already having the Irish company incorporated and registered is likely to mitigate the majority, if not all, of the benefit in incorporating the Irish company in the first place and, assumably, entirely wipes out any profit that the company had earned in Ireland.

This situation would seem far-fetched owing to the level of issues that arise and the wide-ranging implications, but unfortunately, it arises in practice.

If a non-resident company or group is considering incorporating an Irish company to service an Irish project, it is vital that the supply chain is considered in terms of how the Irish company will physically service the project.

If sub-contractors are to be engaged, ideally the Irish company would engage those sub-contractors directly. Where group employees are to be used, it may be possible to second the employees to the Irish company for a period of time. If it is not possible to completely isolate the Irish company and there is some level of the project that must be sub-contracted to a group company, the inter-company agreements in place need to be reviewed to ensure that payments for completely unrelated group activities are not brought within the scope of RCT by virtue of the inter-company agreement’s being tainted by the Irish construction activities.