Why do publicly-traded companies like Ireland?

Ireland is putting its hand up as a jurisdiction for US companies to relocate to

Much has been written about the tax benefits for multinational companies (MNCs) locating in Ireland, both at top holding company level (evidenced by the number of NYSE and NASDAQ listed Irish companies, from Accenture to Actavis and Covidien to Eaton Corporation) and at operating level (from Google to Facebook and Pfizer to Merck). However not enough has been said about the many non-tax reasons why Ireland is an attractive location for MNCs; reasons which often probably feature higher in the decision making criteria than tax. This article, ironically written by tax lawyers in a tax journal, seeks to balance the books.

• One of the primary reasons MNCs regularly cite for choosing Ireland is the availability of a skilled and educated workforce, enhanced by the ability of workers from the twenty seven other member states of the EU to live and work in Ireland. Ireland was voted first in the world for flexibility and adaptability of workforce and third in the world for availability of skilled labour, according to the IMD World Competitiveness Yearbook 2012. To ensure the availability of the necessary skills and expertise in the workplace, university and other higher level education has, in recent years, been deliberately targeted towards science and engineering, creating future workers for the ever-growing number of technology and life sciences companies making their homes in Ireland.

• Locating in Ireland gives access to the EU market of more than 500 million people which is still among the largest markets in the world, notwithstanding the recent downturn. Freedom to trade across its borders, facilitated by Ireland's EU membership, is a desirable outcome for MNCs.

• Ireland is widely recognised as an easy place to do business. In the IBM 'Global Location Trends' report of 2012, Ireland was ranked first in the world for inward investment by quality and value and first in Europe (second globally) for the number of investment jobs per capita.

However, the moves to Ireland that have captured most media attention, both here and abroad, in recent years have been the growing number of US publicly-traded groups that have chosen Ireland as the location for their top holding company. This trend began some years ago when companies like Accenture, Warner Chilcott, Covidien, Cooper Industries, Willis, Ingersoll Rand, Seagate and others migrated from Cayman and Bermuda to Ireland, maintaining their listing in the US. The trend has evolved into direct migrations of publicly-traded entities from the US to Ireland, principally by way of merger with another non-US target in transactions known as 'inversions' to our US colleagues.

"The trend began some years ago when companies like Accenture, Warner Chilcott, Covidien, Cooper Industries, Willis, Ingersoll Rand, Seagate and others migrated from Cayman and Bermuda to Ireland, maintaining their listing in the US"

There have been several such inversions to date and Ireland has been chosen as home for many, including Alkermes (in its acquisition of the drug formulation and manufacturing business unit of Elan), Eaton Corporation (in its merger with Cooper Industries), Perrigo (in its merger with Elan Corporation), Actavis (in its merger with Warner Chilcott), Chiquita (in its merger with Fyffes), Endo Health Solutions (in its merger with Paladin Labs), Forest Laboratories (in its merger with Actavis), Jazz Pharmaceuticals (through its acquisition of Azur Pharma) and Horizon Pharma (in its merger with Vidara Therapeutics). With the exception of the Endo Health Solutions transaction, these inversions have all been effected as part of a merger with a target company incorporated in Ireland and the top holding company of the merged group being located in Ireland. In the Endo Health Solutions transaction, the target company was Canadian and the new parent of the group is now Irish. Ireland, of course, is not the only jurisdiction that has benefited from this trend. In recent times, there have been some inversions from the US to the UK (such as Liberty Global which merged with Virgin Media and the combined group is now UK headquartered) and the Netherlands (such as the merger between Applied Materials and Tokyo Electron which will have its top holding company in the Netherlands).

These deals are not necessarily as straightforward as they may appear because of US anti-inversion rules that prohibit this type of transaction in certain circumstances. In very broad terms, a US corporate group can move its top holding company to Ireland if:

• it has substantial business activities in Ireland (which requires at least 25% of its employees, assets and income to be in, or derived from, Ireland) – this means a company can migrate to another jurisdiction without the need to merge with another entity if it has substantial business activities in that jurisdiction, or it can merge with another entity and the test is then applied to the combined group; or

• it merges with a non-US company and places the top holding company of the merged group in Ireland, provided the former US company shareholders own less than 80% of the shares in the new top holding company.

Clearly, aside from the strategic commercial benefits of a transaction of this nature, by moving the top holding company of the corporate group from the US, the transaction also has the significant additional advantage of potentially moving the non-US profits of the group out of the US corporate tax net, with appropriate post-transaction structuring. Accordingly, an inversion achieves most from a tax perspective for US corporate groups with significant non-US revenues and profits or on a strong growth trajectory outside the US.

Continuing on the theme of tax being only one of many reasons for Ireland's attractiveness to MNCs, one of the principal reasons for the increasing trend of Ireland being the new holding company jurisdiction of choice is the Irish legal system and environment. Like the US and UK, Ireland is a common law jurisdiction and its legal concepts are recognised and understood by most investors. As a common law jurisdiction, it is less prescriptive and more flexible than civil law jurisdictions. Its corporate governance provisions are also similar to those of the US.

The fiduciary duties of directors are similar to those under Delaware law and the Irish courts are reluctant to overturn directors' decisions, absent fraud or bad faith.

Like the US, Ireland has a unitary board system and, where the new Irish holding company is only listed in the US, there is no need to separate the positions of chairman and CEO. US-style directors and officers liability insurance (D&O) policies can also be accommodated, as well as a similar level of indemnity cover for directors and officers given by companies within the group.

In addition, Ireland provides substantial flexibility from a capital management perspective. Share buybacks or redemptions can be effected without the need for shareholder approval as long as the Irish holding company has distributable profits. There is no need for shareholders to approve the payment of dividends. It is also possible to disapply pre-emption rights in respect of issuances of new shares for cash. There is also no pre-emptive right in the case of issuances for non-cash.

Ireland specifically permits modified US GAAP (generally accepted accounting principles) to be used in the preparation of financial statements (both standalone and consolidated) by multinationals migrating to Ireland and which are listed in the US, instead of requiring International Financial Reporting Standards (IFRS) or Irish GAAP. The ability to use US GAAP considerably reduces the cost and administrative burden for Irish incorporated companies listed in the US and is therefore a material advantage.

An increasingly important issue in the decision as to best holding company location is the 'say-on-pay' regime. In Ireland, unlike a number of other jurisdictions, there is no binding or advisory vote regarding a 'say-on–pay' vote for director compensation under current law. In addition, there is no need for a specific directors' remuneration report.

Any new Irish holding company listed on either the New York Stock Exchange or NASDAQ Stock Market is subject to the Irish Takeover Rules. Experience from recent takeovers with Irish companies has shown that, despite their differences, the Securities and Exchange Commission (SEC) rules and regulations and the Irish Takeover Rules can, and do, work well together to produce successful results.

Being an 'onshore' EU jurisdiction is also often a relevant consideration, particularly given the increasing focus on tax haven jurisdictions.

Of course our tax regime is relevant, too. The most critical issues on the tax side that will feature in any comparative analysis of jurisdictions for a top holding company is (i) the taxation of dividend income; and (ii) the tax treaty network. The following are the relevant issues clients look at in considering Ireland:

"Ireland is a common law jurisdiction and its legal concepts are recognised and understood by most investors. It is less prescriptive and more flexible than civil law jurisdictions"

• Ireland has an extensive tax treaty network, with comprehensive income tax treaties with 70 countries, including the US, all EU member states and many Middle Eastern countries. 68 of these income tax treaties are currently in effect, with the remainder to come into force shortly.

• Ireland has a low corporation tax rate (corporation tax on trading profits is 12.5%). While dividends received by an Irish incorporated company are taxed at 12.5% or 25%, a flexible credit system usually eliminates any tax liability in Ireland on receipt and dividends from subsidiaries in EU member states are effectively tax exempt. In addition, other tax-free cash repatriation techniques are available.

• Tax rulings prior to an inversion are rarely required in Ireland.

• The rate of capital gains tax in Ireland is 33%. However, the sale of shares by a non-Irish resident is usually exempt from capital gains tax. An exemption also exists for disposals of 5%+ corporate shareholdings held for at least 12 months in trading companies/groups that are EU/tax treaty resident.

• Dividend withholding tax does not apply to dividends paid to persons resident in an EU or an Irish tax treaty country (for example, the US or Canada) or on US or Canadian listed shares held through American depositary receipts (ADRs), subject to collection of relevant forms.

• The transfer of ADRs (or shares held under an arrangement that is equivalent to an ADR structure) which are issued in respect of Irish companies and traded on a stock exchange in the US or Canada are also not subject to stamp duty.

• Interest withholding tax does not apply to interest paid to persons resident in an EU or an Irish tax treaty country (for example, the US or Canada) or on listed bonds or commercial paper.

• Ireland does not have any thin capitalisation rules or controlled foreign corporation (CFC) rules and also has limited transfer pricing rules.

Underscoring the importance of non-tax drivers in the decision as to best holding company location, some major MNCs headquartered in Switzerland have recently announced plans to leave the country. This, we understand, is motivated principally by recent developments in Switzerland giving shareholders a say in executive pay and compensation, as well as recent enactments seen as attempting to limit the number of non-Swiss nationals living there. Tyco and Weatherford International have both recently announced the move of their top holding companies from Switzerland to Ireland. Pentair's top holding company, formerly in Switzerland, is also soon to be an Irish company (tax resident in the UK).

These moves make it clear that many issues feature in the decision as to best holding company location and it is a mistake to assume that these transactions are purely, or even primarily, tax motivated. In fact, given the OECD BEPS initiative and increased scrutiny of the tax affairs of MNCs around the world, it is clear that the days of locating operations in a jurisdiction without the corresponding substance to support it are probably numbered. Consequently, the non-tax reasons to favour a jurisdiction must continue to feature strongly when executives and their advisers contemplate a move. When all the factors are considered, from the corporate and legal regime to the quality of life to the ease of doing business, Ireland undoubtedly will be high on the list.

Biography
		Conor Hurley Partner, Head of Tax Arthur Cox Tel: +353 (0) 1 618 0577 Fax: +353 (0) 1 618 0618 Email: conor.hurley@arthurcox.com Website: www.arthurcox.com Before joining Arthur Cox, Conor was a tax partner in an international law firm in London for more than 13 years. Conor advises on the tax aspects of a wide range of international and domestic mergers and acquisitions, real estate investments, financial products, repackagings and structured finance, banking, capital markets, investment funds, corporate recovery, insolvency, restructuring and other areas. Conor is also chairman of the firm's US group.

Biography
		Ailish Finnerty Arthur Cox Tel: +353 (0) 1 618 0561 Fax: +353 (0) 1 618 0618 Email: ailish.finnerty@arthurcox.com Website: www.arthurcox.com Ailish specialises in corporate tax with a particular focus on tax planning for international clients doing business in and through Ireland. She acts for a broad range of international clients including multinational corporations, private equity houses, hedge funds and financial institutions as well as growth and emerging companies. Ailish advises on the tax aspects of a wide variety of transactions, including leasing transactions, mergers and acquisitions, disposals, reorganisations and corporate restructurings, inward investment projects, securitisations and all forms of structured financing.