ABOUT THE AUTHORS: Denis Cremins and Michael
O’Reilly are joint Managing Directors of Telos Capital Advisors
Limited
T he reasons for choosing a business location are many and
varied. They include the skills and education of the work force,
the availability of suitable and motivated employees, a stable
political and economic environment, government commitment to
attracting foreign capital, membership of international trade
organisations, accessibility to other international trade and
financial centres and of course taxation. Ireland ticks all of
these boxes and a good few more besides.
This article outlines what Ireland offers multi-national
businesses, whether they are family controlled enterprises or
listed corporations, as a location in which to base overseas
operations as well as being highly competitive for establishing a
global or regional holding company/ headquarters. Any ultimate
decision to locate in Ireland will be based on a comparison of
these advantages and on the personal preferences of the principals
and the directors of the company. What is crystal clear, however,
is that Ireland must be considered in any serious review of
potential locations for business opportunities. Indeed the recent
decisions by many corporate entities to relocate to Ireland from
other jurisdictions demonstrate that Ireland is becoming a
preeminent location for operating and holding companies. These
companies include Accenture, Aviva, Covidien and WPP. For family
enterprises, it may be appropriate to consider basing the family
office in Ireland, though the commercial and business advantages
for the businesses can be gained without relocating the family
office.
Principal considerations
The main economic, commercial and taxation considerations are as
follows:
- Ireland is a member of the EU and is the only eurozone country
with English as a first language.
- Ireland is a member of the OECD and is on the white list.
- Ireland has a highly developed common law legal system.
- Ireland has an open, transparent and developed tax system, with
a specifically legislated and sophisticated holding company tax
regime which facilitates tax efficient structuring for Irish based
business activities and holding companies.
- Ireland has adopted all EU directives on tax free cross border
payments.
- Ireland has a very well educated, highly trained and dynamic
work force, well versed in international business.
- Ireland has, through government commitment and support, a
50-year track record in attracting, retaining and expanding
high-end foreign direct investment (FDI).
- Ireland is with an hour or two of most business and financial
centres in Europe and has direct access to major US centres, with
preclearance for US Immigration and Customs.
- Ireland has no thin cap or CFC legislation.
- Ireland has an extensive tax treaty network.
- Ireland levies only 10.5 per cent payroll taxes on employers,
much lower than many other countries.
- Ireland provides a treble dip for research and development
(R&D) spend, with grant aid of up to 20 per cent a tax
deduction of 12.5 per cent and a tax credit of 25 per cent on the
after grant spend. The tax credit may be refunded in certain
circumstances, subject to a number of conditions.
- To protect the sovereignty of Ireland’s tax system, Ireland has
negotiated an internationally binding agreement with its EU
partners and has agreed with them that the terms of the agreement
will be included in protocols to the next EU treaty.
Ireland’s corporation taxation system
The general principle is that companies resident in Ireland are
taxable on their worldwide profits and income. Residence is
determined by country of incorporation or the country where
management and control is exercised. If a company is incorporated
in Ireland, it is deemed resident here; if it is managed and
controlled in Ireland, it is tax resident here. The board of
directors are the body that exercises management and control. Where
a company is incorporated in one country and managed and controlled
in another, the tax treaty usually contains a tie-breaker clause to
decide on country ofresidence.
Taxation of company profits
- Trading profits are liable to corporation tax at 12.5 per cent.
This rate of tax on trading profits was and continues to be a
central plank of Ireland’s attraction as an FDI location. The 12.5
per cent rate applies to traditional industries such as
manufacturing, retailing, distribution, call centres, etc as well
as to banking, treasury, cash management, captive insurance,
leasing, and group management activities. The 12.5 per cent tax
rate applies to profits from services provided to associated
companies as well as to third party customers. In summary, Ireland
offers one of the lowest corporate tax rates on business activities
in the developed countries of the EU or OECD.
- Non trading profits such as interest, royalties and rents are
taxed at 25 per cent. Dividends received by one Irish resident
company from another Irish resident company are not liable to
further tax. The taxation of dividends from overseas is set out
below under Holding Companies.
- Capital gains are taxed at 25 per cent. Capital losses are set
against capital gains of the same year and can be carried forward
indefinitely. The Holding Company rules provide for exemption on
capital gains arising from the sale of shares in subsidiaries (see
below).
‘Treble dip’ for investment in R&D
The Irish government has a stated commitment to encourage
intellectual property management and R&D in Ireland. Grant aid
of up to 20 per cent of the spend on R&D may be obtained. In
addition, the after-grant spend qualifies for tax deduction at 12.5
per cent and a tax credit at 25 per cent. The credit is set firstly
against the corporation tax liability of the company and any excess
may be refunded. The Irish company must employ the professional
staff conducting the R&D. In other words, the R&D centre in
Ireland must be substantial.
Taxation of dividends between Irish
companies
Where dividends are paid by one Irish resident company to
another Irish resident company, the dividend is not subject to
withholding tax and isnot liable to further tax in the receiving
company.
The taxation of dividends paid
Where an Irish company pays a dividend to a shareholder resident
in a treaty country, no Irish withholding tax is levied on the
dividend. This position applies whether the shareholder is a
corporate or an individual.
Ireland’s Holding Company regime
In 2008, Ireland introduced a comprehensive and easily
understood holding company tax regime. This system is as attractive
as the tax systems for holding companies elsewhere and surpasses
those available in many other countries. The 2008 legislation has
two principal features.
Ireland is an extremely competitive location for a wide
range of business activities
Taxation of Capital Gains
- Where an Irish resident company disposes of shares in another
Irish resident company, or disposes of shares in a company resident
in a treaty country, any gain will be exempt from Irish capital
gains tax.
- The Irish holding company must own at least 5 per cent of the
ordinary share capital of the company for twelve months. The shares
sold may be disposed of in whole or in part.
- The subsidiary must be a trading company or be part of a
trading group.
Taxation of Dividends received from
abroad
Historically, where an Irish company received dividend income
from an overseas company, the dividends were liable to Irish tax at
25 per cent. The Finance Act 2008 changed this position
fundamentally by introducing new rates of tax on dividends from
treaty countries and by introducing a comprehensive system of
pooled foreign tax credits. The system operates as follows:
Dividends received from a treaty country investment out of
trading profits are liable to Irish tax at 12.5 per cent. (Trading
dividends).
Dividends received from a treaty country investment out of non
trading profits or capital gains are liable to Irish tax at 25 per
cent. (Non-trading dividends).
Furthermore, credit is given against the Irish tax of 12.5 per
cent or 25 per cent for foreign withholding tax and foreign
underlying tax (at any level). In addition, the foreign credits are
streamed and any foreign tax credits not used is pooled and the
excess can be used against the Irish tax liability on any
dividends, in the respective streams, for which there is no foreign
tax credit or insufficient tax credit. Any unused foreign tax
credits can be carried forward indefinitely.
The combination of the new tax rates on dividends received and
the pooled tax credit system mean that dividends from treaty
countries are effectively free of Irish tax.
In summary, the 12.5 per cent tax rate on trading profits, the
treble dip for R&D spend, the ability to pay dividends without
withholding to treaty countries, the holding company tax regime
with tax free gains and tax free receipt of dividend income all
mean that Ireland is an extremely competitive location for a wide
range of business activities.
Taxation of shares in Irish companies
Capital gains tax (CGT)
A noteworthy point is the application of Irish CGT on the sale
of shares in an Irish trading or holding company. If the disposing
shareholder is tax resident outside Ireland, the gain is exempt
from Irish CGT, except where the shares are unquoted and derive
their value or the greater part of their value from Irish land on
certain Irish mineral etc rights.
Gift tax/inheritance tax
The gift or bequest of Irish assets will give rise to a
liability to Irish gift tax or inheritance tax. There are generous
exemptions or reliefs if the gift or inheritance is between spouses
or the shares are business property. There are some simple
structures to avoid Irish gift tax or inheritance tax.
To sum up
A multi-national business should consider Ireland as the
location for business operations because:
- The 12.5 per cent tax rate on trading activities makes Ireland
the location of choice for group manufacturing and group services
such as treasury, banking, purchasing etc.
- The tax credit system for R&D expenditure makes Ireland an
exceptional location as the centre for all R&D activities.
- The Holding Company regime makes Ireland the preferred location
to hold investments with significant capital appreciation
potential.
- The holding company regime makes Ireland the ideal location to
receive dividends.
- The entire regime makes Ireland a highly efficient location for
global or regional headquarters.
- Ireland does not have thin cap, transfer pricing or CFC
legislation.
- A group looking for access to an extensive treaty network and
the facility to pay dividends without withholding tax, will find
Ireland the ideal location.
- Ireland is a member of the EU, OECD and the Euro zone.
- Ireland’s government has a proven track record in encouraging
FDI.