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Ireland: Ireland As A Location For International Holding Companies

12 November 2013   (0 Comments)
Posted by: Authors:Andrew Quinn,William Fogarty & David Burke
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Authors:Andrew Quinn,William Fogarty & David Burke (Mondaq)

Over the last 10 years, international tax practitioners will have become increasingly familiar with Ireland's holding company regime. With a stream of high-profile redomiciliations of US and UK listed groups and as the headquarters for global social media and technology groups, Ireland is now in the top-tier of sophisticated jurisdictions for locating a holding company. Although these groups garner the most media attention, a far wider range of corporates are seeing the benefits of Ireland, including private equity funds, sovereign wealth funds, alternative investment funds and family offices. This article examines some of the key attractions and themes which are emerging as Ireland's holding company regime continues to evolve and attract business.

Why Ireland?

With its low tax rate, wide tax treaty network and withholding tax exemptions, a capital gains participation exemption, onshore pooling of dividends and lack of CFC or thin capitalisation rules, Ireland can provide an efficient structure for financing, funds flow and profit extraction for a multinational group. These tax attributes are explained in more detail below. However, the popularity of Ireland is dependent on other factors which are crucially important in the decision to locate a holding company:

1. Ireland is a member of the OECD, an English speaking member of the EU and a common law jurisdiction;

2. Ireland is an established international services hub with a skilled, experienced and well-educated workforce especially in the pharmaceutical, social media and technologies industries;

3. the availability of headquarter office space and lower service costs are seen as attractive when compared with other European cities;

4. Ireland is a well-regulated jurisdiction (offering 'passporting' into the EU) with an efficient commercial court and is easily accessible from Europe and the US; and

5. many international companies have substantial existing operations in Ireland which were originally attracted by the young talented workforce and favourable fiscal environment. The introduction of a holding company can often tap into skillsets, infrastructure and people which are already in place, thus providing valuable substance and credibility to a group's holding company structure.

Tax attractions

Capital gains tax � participation exemption

Where an Irish holding company disposes of shares in a company resident in an EU or treaty state, any gain may be exempt from tax provided at least 5% of the ordinary shares have been held for at least 12 months and the "trading condition" is met. The trading condition is that either the target is a trading company or the business of the holding company and its 5% subsidiaries and the target and its 5% subsidiaries, taken together, consists wholly or mainly of the carrying on of a trade or trades. No advance tax authority clearance is required.

In considering whether a company is trading, the proportion of trading assets and profits to total assets and profits is key but time spent by employees and total turnover are also relevant. The exemption also applies to options over shares or bonds convertible into shares. It should be borne in mind that, if the conditions are met, a loss will not be allowable if a gain would have been exempt.

Dividends � inbound

Dividends received by an Irish holding company from another Irish resident company are exempt from Irish corporate tax. Though foreign dividends are taxable, credit is available for foreign withholding and underlying tax which can minimise or eliminate the Irish tax liability. This unilateral relief applies to tax suffered by a 5% direct subsidiary as well as a subsidiary lower down the group where there is a 5% relationship and the Irish company has 5% control.

As Ireland's 12.5% tax rate can apply to certain 'trading' dividends (see below) there will often be no Irish tax to pay on them; moreover, any excess of foreign over Irish tax may be set off against Irish tax on other trading dividends or carried forward. Other 'non-trading' foreign dividends are taxed at 25%. The same credit pooling principle applies except that the excess credit can be used to reduce tax on both trading and non-trading dividends.

Ireland's 12.5% rate applies to:

1. dividends from other EU or treaty countries which are sourced from trading activities; and

2. dividends from foreign portfolio companies (i.e. less than a 5% interest).

In terms of the trading test, the conditions for application of the 12.5% rate are:

1. that 75% or more of the dividend paying company's profits are trading profits, either trading profits of that company or dividends received by it out of trading profits of lower tier companies that are also resident in an EU or treaty country; and

2. that on a consolidated basis, the aggregate value of the trading assets of the dividend receiving company and all of its subsidiaries must not be less than 75% of the aggregate value of all of their assets.

Financing � tax deductions for interest Payments

Ireland has limited thin capitalisation rules (or other restrictions on interest deductibility) and therefore an Irish holding company may be financed principally by debt. A tax deduction is potentially available for interest on funds used to acquire ordinary shares in a trading company or the holding company of a trading company. A deduction may also be available for funds used to lend to trading subsidiaries provided they are used wholly and exclusively for the purpose of the subsidiary's trade or the trade of a connected person.

Extracting profits from an Irish holding Company

There is no Irish capital gains tax on disposals of shares in an Irish company by a non-Irish resident, except where the Irish company derives the greater part of its value from Irish land or Irish mineral rights.

Although Ireland levies 20% dividend withholding tax, there are significant exemptions. In particular, no withholding tax should arise on payments to residents of EU/treaty states. Additionally, payments to a company resident in any country can still be made free of Irish withholding tax provided that the company is ultimately controlled by EU (other than Ireland)/treaty state residents. For example, dividend payments to a Cayman Islands company which is controlled by an EU or treaty resident investor should be free of withholding tax.

Ireland also imposes 20% withholding on interest but again there are broad exemptions which diminish the impact of this in practice. In particular, there is no withholding on payments to companies in an EU or treaty state or on listed bonds or commercial paper.

Certainty and clarity

Ireland's common law legal system and tax regime continues to offer clarity and certainty to investors. The tax treatment is based on rules on which legal opinions can be given and is not dependent on private rulings. A long established EU jurisdiction, Ireland was rated in 2012 as the easiest country in Europe in which to deal with business taxes for the fifth year running.

Tax treaties

Ireland has 69 double tax treaties of which 64 are in effect (as at August 2013) and is currently in negotiation with a number of other countries to implement its policy of expanding this wide treaty network. Coupled with the ability to use EU directives on cross-border payments, foreign withholding tax on royalty, interest and dividend payments to an Irish company can be eliminated or reduced.

Stamp duty

There is generally no Irish stamp duty on issuing shares or debt in an Irish incorporated company or on transferring shares in a non-Irish company. However, transfers of shares in an Irish company are generally subject to 1% stamp duty subject to certain reliefs and exemptions. In a group holding company context this may not be a material issue on the basis that the company's shares are not regularly bought and sold. In a public company context there are a number of methods of reducing or eliminating the tax to allow for stamp duty free trading of shares. In a US context, it is notable that there are a number of Irish resident holding companies operating on US stock exchanges, including one of the most recent entrants on the New York Stock Exchange, Fleetmatics plc. Shares in Irish incorporated companies can be traded through the Depositary Trust Company (DTC) or held in American Depositary Receipt (ADR) systems. The transfer of ADRs or shares through DTC should not give rise to a charge to stamp duty.

For listings on other exchanges, a non-Irish incorporated company can be considered. In particular UK listed international companies, such as Experian and Shire, have involved Irish resident, but Jersey incorporated companies. Although the company retains the benefit of the Irish holding company regime, the transfer of such shares should not be subject to Irish stamp duty.

Trends

US inversions

One development which has attracted significant interest is the stream of US corporates seeking to utilise Ireland as part of a migration from the US using the US inversion

rules. Effectively, these involve the use of an Irish company to acquire the US entity as part of a corporate restructuring. There are a number of examples of this, including the Eaton Corporation and Cooper Industries transaction in May 2012. A new Irish public company was formed which acquired both Cooper Industries through a scheme of arrangement and then, using a US subsidiary, merged with Eaton Corporation. Similarly, Jazz Pharmaceutical's acquisition of the privately held Irish company, Azur Pharma, led to an Irish incorporated entity being the new ultimate holding company of the group.

The US rules on inversion transactions were significantly amended in July 2012 and continue to be the subject of ongoing debate. However, Ireland has thus far proved to be a favoured jurisdiction in which to execute such transactions, provided the facts fit the rules, especially in industries such as pharmaceuticals where Ireland is used to host substantial business activities of the group. The recently announced acquisition of Elan by Perrigo will also result in an Irish company being a new group holding entity.

Local holding companies

Within group structures, or investment structures, Ireland's attractiveness as a local holding company is also evident. The recent unfortunate events in jurisdictions such as Cyprus have led investors to redomicile their EU holding and investment platforms to Ireland. In other instances, the continuing debates over perceived 'treaty shopping' have led some to prefer using jurisdictions where existing operations are already in place. As noted earlier, Ireland's success at attracting leading international companies to base significant operations and staff in Ireland means that it is a natural choice within which to place a European or EMEA holding company.

This article first appeared in mondaq.com.


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