The 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.
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 of residence.
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 is not 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.
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