Ireland as an attractive holding company jurisdiction post-BEPS
Ireland remains one of the most attractive jurisdictions in the world in which to establish a holding company, explain Peter Vale and Sarah Meredith of Grant Thornton.
Ireland was the only country ranked among the top 15% of countries in the world in every one of the 11 metrics Forbes recently examined in its study on the best countries for business. Ireland leads the way in terms of having a low tax burden and offering investor protection.
Even many non-tax practitioners will at this stage have some knowledge of the OECD's BEPS project. Substance is going to be a key focus of the post-BEPS tax environment and we expect this to be broadly positive for Ireland. Multinational companies (MNCs) will look to house employees and key assets in a country with a stable political environment, solid infrastructure, availability of labour and, importantly, a low tax environment. Ireland ticks all the boxes in this regard.
Is the above relevant to the holding company decision? Very much so, as having both a favourable holding company regime and other positive tax attributes enables Ireland offer a full suite of tax advantages to the overseas investor.
This is borne out when you consider the number of global MNCs in Ireland, most with both an Irish holding company and substantial trading operations:
Nine out of the top 10 global pharmaceutical companies are located in Ireland;
Eight of the top 10 medtech companies are located in Ireland;
Three of the top six game publishers are based in Ireland;
13 of the top 20 medical devices companies are operating in Ireland; and
50% of all leased aircraft are managed in Ireland.
In terms of composition, US investment constitutes 73% of all Ireland's foreign direct investment FDI.
The ability to offer a complete package of tax benefits has meant that Ireland has been used by many multinationals looking to launch into Europe or further afield.
They are many reasons why Ireland is ranked as a popular holding company jurisdiction.
Benefits available to foreign investors looking to establish an Irish holding company
Capital gains tax (CGT) exemption
A full participation exemption from CGT is available to companies in Ireland for disposals of shares in a company resident in the EU or a tax treaty jurisdiction.
Certain conditions must be met before the exemption will apply. In particular:
the Irish parent company must hold a minimum of 5% of the investee company's ordinary share capital for a period of more than 12 months over the preceding 24 months;
the investee company must be resident in an EU state (including Ireland) or tax treaty country; and
at the time of disposal, the investee must exist wholly or mainly for the purposes of carrying on a "trade" (or the group and investee taken together must be regarded as a trading group).
While the activities of most companies would be regarded as trading, the receipt of rental income from buildings is an example of a non-trading activity. However, in many cases the "group trading" exemption can be used to ensure that disposals of non-trading companies are tax free. The group trading exemption can also be used to liquidate cash box subsidiaries and return the cash tax-free to the Irish parent company.
Tax relief on dividend income
Ireland operates a foreign tax credit system rather than a system of participation exemption in relation to foreign dividends.
Broadly, dividends paid out of the trading profits of a company tax resident in an EU member state or in a country with which Ireland has a double tax treaty will be taxable in Ireland at 12.5%. In qualifying listed-group situations, qualifying dividends from subsidiaries in non-treaty / non-EU locations can also qualify for the 12.5% rate.
As a result of recent EU cases, new legislation was introduced in Ireland on the taxation of foreign dividends from 2013. In essence, a system now applies whereby a tax credit is given for the overseas tax at the foreign nominal tax rate rather than the effective tax rate. The system provides for an Additional Foreign Tax Credit (AFTC), further boosting the tax relief position for foreign dividends.
This AFTC may top-up any existing tax credit to a maximum 12.5% / 25% rate (depending on the nature of the dividend) where a dividend is received from a company resident in a 'relevant Member State' (that is, EEA, being the EU, Norway and Iceland).
In the majority of cases, the 12.5% rate, when combined with credits for withholding or underlying taxes, should ensure that no further Irish tax is payable on such income.
Ireland generally applies a 20% withholding tax on dividends and other profit distributions. However, in practice dividend withholding tax is rarely an issue as exemptions within Irish domestic legislation generally result in a nil withholding tax rate applying.
Access to treaties and EU directives
Ireland has an extensive treaty network, with 68 double tax treaties in effect. These agreements allow the elimination or mitigation of double taxation.
Ireland in particular has very favourable tax treaties with a number of Asia Pacific jurisdictions such as China, Hong Kong and Korea, which can often make Ireland an attractive location from which to invest into these countries.
Where a double tax agreement does not exist with a jurisdiction, unilateral provisions within domestic Irish tax legislation may result in credit relief against Irish tax for any foreign taxes paid.
Irish legislation may also provide for an exemption from Irish withholding taxes on payments to treaty residents, without the need to refer to the provisions of the specific treaty. And Irish companies may access the EU directives, which can be beneficial from a tax perspective.
R&D tax credit continues to encourage innovation
For many multinationals, there is a desire to expand the scale of activities in the holding company jurisdiction beyond the mere holding of shares. In some cases, this can involve the relocation of R&D functions to the holding company jurisdiction.
Ireland has an attractive R&D tax credit regime. Broadly, it entitles companies to a refund of 25% of their R&D expenditure, regardless of whether they pay tax on profits (subject to certain limits). Combined with the standard corporate tax deduction for R&D expenditure (valued at 12.5%), companies incurring qualifying R&D expenditure can claim a tax benefit of €37.50 ($50.38) for every €100 expenditure.
Finance Act 2014 extended the outsourcing limit to 15% (from 10%) of the in-house spend, with the first €100,000 qualifying for the credit regardless of this limit. There was also a change in relation to the base year spend such that the first €300,000 of qualifying R&D spend will qualify for the credit regardless of the base year (that is, 2003) spend.
The credit is also available for buildings used wholly or partly for R&D purposes, subject to certain conditions.
A company's R&D tax credit may also be surrendered against "key" employees' income tax, providing an attractive incentive for those employees.
It is worth noting that one-third of new R&D projects are in collaboration with Irish third-level institutions and research institutes backed by research funding and grants.
Intellectual property relief
Intellectual property (IP) is also often located in the holding company jurisdiction. For example, a US multinational looking to expand into Europe may use an Irish tax resident company, with the European IP rights located there. From 2009, the tax rate on the IP related profits can be as low as 2.5% (see below).
To avail of the IP relief, a company must be "trading" in Ireland, meaning that there must be sufficient substance in Ireland, that is, the company should actively seek to exploit its IP and employ/subcontract expert individuals to carry out its activities.
The allowances available for tax purposes will generally follow the standard accounting treatment applicable to the amortisation of intangible assets; however, if it results in a better answer, an irrevocable election can be made to spread the expenditure over a 15-year period (7% in years 1 to 14 and 2% in year 15).
The aggregate of the allowances and any related interest incurred on acquisition of the intangibles cannot be more than 80% of the trading income from the intangibles trade (which is treated as a separate trade). Where either allowances or interest is restricted, the excess can be carried forward.
The combination of the 80% maximum relief and the 12.5% corporation tax rate can mean the effective tax rate on IP-related profits is as low as 2.5%.
A broad stamp duty exemption also applies to the acquisition of IP, which ensures that stamp duty is not a barrier to centralising IP in Ireland.
The decision to relocate a holding company often means the physical movement of key individuals to that location. Income tax rates for individuals vary depending on salary but a targeted relief from income tax was introduced to attract top talent to Ireland.
This is known as the Special Assignee Relief Programme (SARP) and is designed to incentivise key employees locating to Ireland. The relief is broadly aimed at higher earners and, while there are various conditions attached, it can offer a valuable tax break to senior executives locating in Ireland.
And relief known as the foreign earnings deduction applies to workers being posted to BRICS (Brazil, India, China and South Africa) and certain African countries. A deduction is available from taxable income which will reduce the charge to Irish income tax where the requisite conditions have been satisfied.
Irish tax rate – corporation tax
Holding companies will often provide management services to group companies. Profits from such activities will generally be taxable at the lower 12.5% rate. The lower corporation tax rate (which applies to trading activities) represents one of the lowest onshore statutory corporate tax rates in the world. Even with international pressure, the Irish government remains committed to retaining the 12.5% rate to ensure it has a competitive corporate tax strategy to attract job-rich FDI into Ireland. It remains a cornerstone of Irish taxation and economic policy.
CFC / thin capitalisation
Importantly from a holding company perspective, Ireland does not have CFC or thin-capitalisation rules. There are certain restrictions on related-party borrowings but these are generally manageable.
Transfer pricing and financing structures
Limited transfer pricing legislation has been introduced in Ireland. The law applies to both domestic and cross-border trading transactions between group companies and also applies to Irish branches of foreign companies that are within the charge to Irish tax on their trading activities.
However, there is a full exemption for small and medium sized entities. A small or medium sized entity is one with a staff head count of less than 250 and an annual turnover of €50 million or less, or an annual balance sheet total of €43 million in assets or less, with the figures assessed annually on a group-wide basis.
The transfer pricing legislation applies only to trading activities. This is an important feature as many tax-efficient financing structures through Ireland are thus unaffected.
Managing Irish tax residence key
It is important that the Irish incorporated holding company is also regarded as Irish tax resident. As a general rule, to ensure Irish tax residence, it is important that an Irish company is centrally managed and controlled in Ireland. The location of all board meetings of the company should be Ireland and key strategic decisions should be made at these meetings.
Investment for the long term
Ireland remains an extremely favourable location in which to locate holding companies. The suite of factors supporting this include easy access to key markets, low corporate taxes, promotion of innovation, a young, educated workforce and an excellent business environment.
We know that the tax landscape of today will look very different in the future. Groups making investment decisions now are taking a long-term perspective, based on an assessment of the likely future global tax climate once the dust settles.
While this in itself is a difficult task, we believe Ireland's transparent and favourable tax regime make it exceptionally well placed to attract foreign investment for many more years to come.
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Peter Vale is a tax partner in Grant Thornton's Irish tax practice.
He specialises in international corporate tax structuring including financing structures, company migrations and M&A projects. His clients include both large Irish domestic and multinational corporations. He also specialises in financial services taxation and has advised many clients on Ireland's financial services tax regime.
Before joining Grant Thornton, Peter spent 12 years in the tax department of a big-four firm in Dublin.
Peter is a member of the Institute of Chartered Accountants in Ireland and an associate of the Irish Taxation Institute. He holds a bachelor degree in international commerce. He is also a council member of the Leinster Society of Chartered Accountants in Ireland.
Tel: +353 1 680 5784
Sarah Meredith is a manager in Grant Thornton's Irish tax practice. She joined Grant Thornton in 2010 having worked for more than four years in a big-four firm.
Sarah has international tax experience and has also been involved in a number of group restructuring and acquisition projects. Her clients include both Irish and multinational groups and corporates. She also has experience on a diverse number of financial services clients and has provided both tax compliance and advisory services to these clients.
Sarah is an associate member of both the Institute of Chartered Accountants in Ireland and the Irish Taxation Institute. She holds a first class honours degree in economics from Trinity College, Dublin.