Ireland's favourable tax regime has resulted in a number of well-known groups moving their headquarters to Ireland to access the benefits here including Shire, LinkedIn and Facebook. Multinationals such as Apple, PayPal, EA and Fidelity made significant investments in 2012.
The ability to offer a complete package of tax benefits has meant that Ireland has been used for many multinationals looking to launch into Europe or further afield.
The statistics back up the above. The top 10 born on the internet companies have chosen Ireland for their foreign direct investment, together with eight of the top 10 US ICT companies and nine of the top 10 global pharma groups. Other groups have moved their holding company to Ireland while many more use an Irish sub holding company to hold their European and/or Asian subsidiaries.
There are many reasons why Ireland is ranked as a popular holding company jurisdiction. This article examines some of the benefits businesses can expect to avail of including:
|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 in respect of the disposals of shares in a company resident in the EU/tax treaty resident countries.
Nevertheless, there are certain conditions which must be met before the above exemption will apply. In particular:
- The Irish parent company must hold a minimum of 5% of the subsidiary'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.
Finance Act 2012 extended the 12.5% rate to countries with which Ireland has concluded the OECD Convention on Mutual Assistance in Tax Matters, which would bring dividends from countries such as Ukraine and Brazil within the lower tax rate bracket.
As a result of recent EU cases, new legislation was introduced in Ireland regarding 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).
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 the 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.
|Further improvements to foreign tax credit rules for dividends received by Irish companies|
Ireland generally applies a withholding tax on dividends and other profit distributions at a 20% rate. However, in practice DWT is rarely an issue as there are several exemptions that generally result in a nil withholding tax rate applying.
Access to treaties and EU Directives
Ireland has an extensive treaty network, with 64 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.
|Ireland’s tax treaties continue to expand globally|
Where a double tax agreement does not exist with a particular jurisdiction, unilateral provisions within domestic Irish tax legislation may result in credit relief against Irish tax for any foreign taxes paid. In addition, Irish legislation may provide for an outright exemption from Irish withholding taxes on payments to treaty residents, without the need to refer to the provisions of the specific treaty. Furthermore, 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 tax expenditure, regardless of whether they pay any 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 ($49)for every €100 expenditure.
|Effective 37.5% tax rebate for R&D|
The credit is also available in respect of buildings used wholly or partly for R&D purposes, subject to certain conditions.
In addition, a company's R&D tax credit may be surrendered against key employees income tax, providing an attractive incentive for these employees.
Intellectual property relief
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 therein. Following changes made in 2009, the tax rate in respect of 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 their intellectual property 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 instead be made to spread the expenditure over a 15 year period (7% in years one to 14 and 2% in year 15).
The aggregate of the allowances and any related interest incurred on acquisition of the intangibles cannot exceed 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%.
|Tax efficient IP structuring opportunities|
In addition, a broad stamp duty exemption applies to the acquisition of intellectual property, which ensures that stamp duty is not a barrier to centralising intellectual property 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 it was felt that Ireland needed to introduce a targeted relief from income tax to attract top talent to the country.
Accordingly, Finance Act 2012 introduced an improved special assignee relief programme (SARP) 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.
Irish tax rates: 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.
|Irish government committed to maintaining the 12.5% rate|
The lower corporation tax rate represents one of the lowest onshore statutory corporate tax rates in the world. The Irish government remains committed to retaining the 12.5% rate to ensure it has a competitive corporate tax strategy to attract job-rich foreign direct investment into Ireland.
Importantly from a holding company perspective, Ireland does not have controlled foreign company (CFC) or thin capitalisation rules. There are certain restrictions in respect of related party borrowings but these are generally manageable.
Transfer pricing and financing structures
For accounting periods commencing on or after January 1 2011, 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/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 new legislation only applies to trading activities. This is an important caveat as many tax efficient financing structures through Ireland are thus unaffected by the changes.
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. Key strategic decisions should be made at these meetings.
By choosing the correct location for a holding company, an international group can minimise on tax leakages both on the earning of income and future disposals. By virtue of its favourable tax and corporate laws, its network of double tax treaties and its status as an EU and OECD member, Ireland can often provide the answer.
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 4 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.
Sarah Meredith is a manager in Grant Thornton's Irish tax practice. She joined Grant Thornton in 2010 having worked for over four years in a Big 4 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.
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