Ireland: Holding Companies In Ireland

Ireland has long been a destination of choice for holding companies because of its low corporation tax rate of 12.5%, its participation exemption and the general ability to pay and receive dividends free of withholding tax.

The recent decisions of Shire and UBM to re-locate to Ireland from the UK and the surge in interest from other UK based companies in re-locating their holding company operations to Ireland can be seen as proof of the continuing international appeal of Ireland as a holding company regime.

Ireland is of particular interest in the following circumstances:

• as a location for global or regional headquarters;

• to avail of the extensive exemptions from dividend withholding tax on dividends paid by an Irish company;

• to hold subsidiaries that have scope for significant capital appreciation;

• to access Ireland's treaty network and the EU Parent-Subsidiary Directive in order to reduce the tax burden on dividends received from foreign subsidiaries;

• where a jurisdiction is required that does not have controlled foreign corporation legislation;

• where a jurisdiction is required which does not have thin capitalisation or transfer pricing rules;

• where it may be important to achieve a tax free unwind of the holding company at some stage in the future;

Although tax considerations may not be the overriding factor when deciding on a location for the establishment of a holding company, they would certainly feature prominently in such a decision.

While from a taxation perspective no one location is going to be the optimal holding company location for all groups in all scenarios, Ireland should certainly feature strongly in the large majority of shortlists when holding company locations are being considered. This document focuses solely on the Irish tax considerations which may be relevant in the decision to establish a holding company in Ireland. It should be borne in mind that there are other legal considerations to bear in mind; these include the availability of grants and other fiscal incentives, applicable employment legislation, and general corporate law to name but a few.

The Irish tax issues associated with establishing an Irish holding company are reviewed under the following headings:

• establishment of an Irish holding company;

• disposition of shares in an Irish holding company;

• taxation of Irish holding companies;

• tax treaty network;

• ceasing operations in Ireland.

Establishment of an Irish Holding Company

A holding company incorporated in Ireland must take one of the forms provided for by Irish corporate law. The most commonly used structure for a holding company is a private limited liability company or a private unlimited company. There are no minimum equity requirements for an Irish private company.

Financial statements must be prepared in accordance with accounting standards (Irish GAAP or IFRS) generally accepted in Ireland and with Irish corporate law comprising the Companies Acts, 1963 to 2006.

Disposition of Shares in an Irish Holding Company

Capital Gains Tax

Capital Gains Tax for non-Irish tax residents arises on the disposition of shares only where those shares derive the greater part of their value from Irish situated minerals or mining rights or Irish real property.

Stamp Duty

Stamp duty is a one-off tax on documents implementing certain transactions.

The transfer of shares attracts stamp duty at a rate of 1% (based on the fair market value of the shares). There are, however, various relief's and exemptions available in respect of the acquisition of intellectual property, dealings in certain financial instruments, transactions involving associated companies and group re-organisations. Where a charge to stamp duty does arise it is payable within 30 days of the execution of the relevant documents.

Transfers of Irish land attracted stamp duty at rates of up to 9%. The Finance (No.2) Act 2008 has reduced the top rate of stamp duty for transfers of Irish land to 6%.

Irish Gift and Inheritance Tax

If shares are transferred by way of gift or inheritance, capital acquisitions tax may arise on the value of the shares which form the gift or inheritance. The Finance (No.2) Act 2008 has increased the rate of capital acquisitions tax from 20% to 22%.

Taxation of Irish Holding Companies

General taxation regime

Ireland has an extremely favourable corporation tax rate of 12.5% on profits earned in the course of an active business (a trade). Passive income earned by a company is taxed at a rate of 25%. The Revenue Commissioners have established a process whereby they will give an opinion as to a taxpayer's entitlement to the 12.5% Corporation Tax regime.

Controlled Foreign Corporation ("CFC") Legislation

Ireland does not currently have CFC legislation.

Thin Capitalisation

Irish tax legislation does not contain thin capitalisation rules, but it does re-characterise certain interest payments in certain cases as non-deductible interest.

Deduction of cost

• Generally the expenses of management are deductible against a holding company's taxable profit.

• Furthermore, an Irish holding company will generally obtain (on a paid basis) a deduction for interest on loans relating to the acquisition (or lending) of shareholdings subject to certain restrictions.

Although interest payments made outside the EU to non-resident parent companies or to other non-resident companies where there is 75% common control are treated as distributions (and consequently not tax-deductible), interest will in most cases be deductible where it is paid to a company resident in a country with which Ireland has concluded a double tax treaty (pursuant to the Finance (No.2) Act 2008 treaty countries now include those countries with which a double tax treaty has been signed but not yet ratified) or EU Member States. There are restrictions on financing intra-group acquisitions with debt from a related party which would need to be considered in the relevant circumstances.

Tax consolidation

There are no express provisions in Irish tax law for the consolidated filing of tax returns by related companies. However excess management expenses of investment companies (which may include holding companies), trading losses and excess deductible interest expenses may be offset against the Irish profits of other members of the group for the same financial period.¹

Relief will also be available to Irish companies in respect of trading losses incurred by their non-Irish resident subsidiary companies (provided that the surrendering company is a direct or indirect 75% subsidiary of the claimant company) that are resident either in an EU Member State or alternatively an EEA State with which Ireland has a double tax treaty provided certain conditions are met.

Close Companies

The close company legislation is designed to prevent proprietary directors and shareholders avoiding or deferring income tax through the use of closely held (usually family owned) companies. In determining whether or not a company is a close company, the principal test is one of control. Control by five or fewer participators or by participators who are directors whatever the number, is the basic determinant of close company status. These provisions may impact on holding companies (where such companies come within the definition of a close company) by subjecting dividends received from Irish companiesm which are not further distributed as a dividend to the holding company shareholders within 18 months of the financial year end, to an additional corporation tax surcharge of 20%. In addition passive income on other investments not qualifying for participation exemption is liable to additional tax at 15%.

The Finance (No.2) Act 2008 provides an option where a close company pays a dividend to another close company for both companies to jointly elect for the dividend not to be treated as a distribution. The effect of this change is that a dividend received from an Irish subsidiary by an Irish holding company will not be treated as part of the holding company's surchargeable income and will allow, for example, the holding company to pay down debt instead of being obligated to distribute such dividends to its shareholders in order to avoid the surcharge. This change amends the law so as to bring the treatment of Irish dividends in line with that of foreign dividends received by a holding company which are not subject to the close company surcharge.

This change however will not allow the subsidiary to avoid the close company surcharge as the election will mean that the dividend is not treated as a distribution, hence, where a subsidiary dividends surchargeable income to its holding company and makes the election, it will still be liable for the surcharge as the election means that no dividend is deemed to have been paid by the subsidiary. This is a very welcome measure for holding companies that come within the definition of close company as where the option is exercised, the close company surcharge will not apply to dividends received from its Irish subsidiaries.

Taxation of dividend income

Dividends and other profit distributions received by an Irish resident company from another Irish resident company are exempt from tax.

Prior to the introduction of the 2008 Finance Act dividends paid to an Irish company from non-Irish resident companies were subject to corporation tax at a rate of 25%, regardless of whether the dividends had been paid to the Irish company from passive or trading profits.

The 2008 Finance Act changes this position by providing that dividends paid by a company located in the EU or in a country with which Ireland has a double tax treaty, or, pursuant to the Finance (No.2) Act 2008, in a country with which Ireland has signed but not yet ratified a double tax agreement, to an Irish company will be chargeable to corporation tax at the rate of 12.5% (as opposed to 25%) to the extent that the dividend is paid out of "trading profits". In the majority of cases the application of the 12.5% rate of corporation tax and double tax relief should ensure that no further Irish tax arises on such dividends. The 12.5% rate will also apply where the dividend is paid out of dividends received by the foreign company from the trading profits of its subsidiaries. If only part of the dividend is derived from "trading profits" then the requisite part of the dividend will be liable to tax at 12.5% with the balance taxable at 25%. The 2008 Finance Act also provides for a de-minimis rule which, when applicable, provides that the whole of the dividend is to be charged to corporation tax at the 12.5% rate despite the fact that part of the dividend received by the Irish company may not have been received from trading profits. The de-minimis rule applies when 75% or more of the profits of the dividend paying company are trading profits of that company or dividends received by it out of trading profits of lower tier companies that are resident in a EU Member State or a tax treaty country (the Finance (No.2) Act 2008 has extended this relief to countries with which Ireland has signed but not yet ratified a double tax agreement) and the aggregate value of the trading assets of the dividend recipient company and all of its subsidiaries (at the end of accounting period is which the dividend is received) is more than 75% of the aggregate value of all of their assets.

Foreign tax credit on income received by an Irish company

Dividends paid to an Irish company may be liable to a withholding tax on payment in the country of origin.

Foreign taxes on dividends received by an Irish company may be relieved in Ireland in three ways:

• under unilateral provisions of Irish tax law, which includes a system of tax credit "pooling";

• in accordance with the EU Parent-Subsidiary Directive;

• under bilateral treaty provisions.

A company receiving a foreign dividend may set the foreign tax on the dividend against Irish tax on that dividend. In certain circumstances where the foreign tax related to a dividend exceeds the Irish tax on that dividend the excess may be offset against Irish tax on the remaining foreign dividends received in the same accounting periods. In respect of dividends received on or after 31 January 2008, two pools of tax credits are available; one for foreign dividends subject to tax at 12.5% and one for dividends subject to tax at 25%. Where the unrelieved foreign tax credits in an accounting period exceed the aggregate amount of corporation tax payable, the excess may be carried forward for offset in subsequent periods. This 'pooling' regime can result in an effective exemption from tax.

Research and Development Tax Credit

In certain circumstances Irish tax legislation provides for a tax credit for research and development expenditure. The credit is equal to 20% of incremental expenditure incurred by a company on qualifying research and development ("R&D"). The credit for incremental expenditure has been increased to 25% in the Finance (No.2) Act 2008 and will apply to accounting periods commencing on or after 1 January 2009. The credit, where applicable, may be set against the corporation tax liability of the accounting period in which the R&D expenditure is incurred. Any unused credit may be carried forward by the company. Increasing the tax credit to 25% sends a very clear signal that Ireland is open to R&D business.

A company's R&D tax credit is calculated based on its incremental R&D spend over and above its qualifying R&D spend in its base year. The Finance (No.2) Act 2008 also sets 2003 as the base year for all future accounting periods. It should be noted that the Finance (No.2) Act 2008 reduces the time limits in which R&D credit claims must be made to 12 months from the end of the accounting period in which the qualifying expenditure was incurred. This amendment will apply to claims made on or after 1 January 2009.

The Finance (No.2) Act 2008 has removed the requirement in relation to claiming tax credits for expenditure which must be incurred on a building or structure used "wholly and exclusively" for the purpose of R&D activities and effectively replaced it with a requirement that the building or structure has a minimum of 35% use which is attributable to the R&D activities carried on by the company for a defined 4 year period. The full tax credit will be available for offset against the corporation tax liability of the company for the accounting period in which the relevant expenditure is incurred (as opposed to being spread over 4 years as is currently the case).

These changes have provided increased certainty for investor companies wishing to carry out qualifying R&D and highlights Ireland's commitment to continue to attract direct foreign investment in the area of R&D.

Capital Gains Tax Participation Exemption on Disposal of Shares

The legislation provides that the disposal of shares in a subsidiary company by an Irish holding company will be exempt from Irish capital gains tax provided the following conditions are met;

• the holding company must have held at least 5% of the ordinary share capital (including the rights to profits and assets on a winding up) for a continuous 12 month period and the disposal must take place during or within 2 years after the date of meeting the aforementioned holding requirement. Therefore if a disposal is made which brings the shareholding below 5% the remaining shareholding will still qualify for the participation exemption provided the remaining shares are disposed of within 2 years.

• the shares being disposed of must be in a company resident in the EU (including Ireland) or in countries with which Ireland has concluded a double tax treaty or pursuant to the Finance (No.2) Act 2008 in a country with which Ireland has signed but not yet ratified a double tax treaty.

• the time of disposal, the shares being disposed of must be in a company whose business consists wholly or mainly of the carrying on of a trade or trades, or if taken together, the businesses of the holding company and that of the companies in which it has a direct or indirect 5% or more holding consist wholly or mainly of the carrying on of one or more trades.

The Irish tax authorities have issued guidance in relation to the "wholly or mainly" test. The guidance confirms that "wholly or mainly" means greater than 50%. It also outlines that the primary tests to determine whether a company or group is wholly or mainly trading are the proportion of net trading profits and the proportion of net trading assets, though other factors may be taken into account.

If the holding company is unable to meet the minimum holding requirement, but is a member of a group (comprising a parent company and its greater than 50% worldwide subsidiaries), and the holding requirement can be met by including holdings of other members of the group, then the gain arising on the disposal will still be exempt from capital gains tax. Therefore, an Irish resident company may be exempt from capital gains tax on a disposal of shares even if it does not directly hold a significant shareholding.

The exemption may apply to a disposal of assets related to shares, such as options and convertible debt, but will not apply to the disposal of either shares or related assets that derive the greater part of their value from Irish real property or Irish situated minerals or mining rights.

In determining whether the exemption conditions are met, it should be noted that

• the holding company need not hold its entire shareholding for the minimum holding period of 12 months; the disposal of shares will be exempt provided it holds 5% of the shares for that period.

• furthermore, the holding company is not required to dispose of its entire shareholding to obtain the participation exemption; once the prescribed holding requirements as outlined as above are met, the gain arising on any piecemeal disposal will be exempt.

• in the case of stocklending and repo transactions, for the purposes of determining the holding period, the period during which the shares have been temporarily lent or sold will be regarded as a period of ownership of the original holder.

• on liquidation, a liability to capital gains tax may arise on the disposal of assets by the liquidator, however gains or losses that arise on liquidation are deemed to be gains or losses of the company. In this regard, the exemption should apply (once the necessary conditions are met) to the extent there is a disposal in the context of the liquidation.

Repatriation of dividends from Ireland

Withholding tax of 20% must be applied in respect of dividends paid and other profit distributions made by companies resident in Ireland. The obligation to withhold tax is placed on the company making the distribution.

Exemption from dividend withholding tax is available to non-resident shareholders in the following circumstances under domestic law, where the dividend is paid to individual recipients resident in the EU or in a country with which Ireland has a tax treaty;

• under domestic law, where the dividend is paid to a company resident in the EU or in a country with which Ireland has a tax treaty or pursuant to the Finance (No.2) Act 2008 in a country which Ireland has signed but not yet ratified a double tax agreement and which is not controlled (more than 50%) by Irish residents;

• under domestic law, where the dividend is paid to a company that is under the ultimate control of persons resident in another EU Member State or in a country with which Ireland has a tax treaty or pursuant to the Finance (No.2) Act 2008 in a country which Ireland has signed but not yet ratified a double tax agreement;

• under domestic law, where the dividend is paid to non-resident company, the principal class of whose shares is listed and regularly traded on a recognised stock exchange in a treaty country or another Member State, or on another stock exchange approved by the Minister for Finance. This exemption also applies where the recipient of the dividend is a 75% or more subsidiary of such a listed entity;

• under domestic law, where the dividend is paid to a non-resident company that is wholly owned (directly or indirectly) by two or more companies, the principal class of each which is listed (and regularly traded) on a recognised stock exchange approved by the Minister for Finance;

All of the foregoing persons must make a declaration in a specific format laid down in the legislation and if there are no changes in circumstances the exemption should last for five years.

• in accordance with the EU Parent-Subsidiary directive, where the dividend is paid by a subsidiary company to its EU parent (for this purpose, the Irish requirement is a 5% minimum holding).

Stamp Duty

Stamp Duty at a rate of 1% (based on fair market value) may arise on the transfer of shares in Irish companies. Stamp duty law provides a group relief which can eliminate duty on transfers of shares within a group of companies. This relief is known as "associated companies relief". To qualify for associated companies relief the companies in question have to be 90% associated. For two companies to be associated one must have in relation to the other;

• beneficial ownership of 90% of its ordinary share capital; and

• beneficial entitlement to 90% of the profits available for distribution; and

• beneficial entitlement to 90% of the assets in a winding up.

OR

• a third company must have these rights in relation to both the companies in question.

If either the buyer or the seller leaves the group within two years of the date of the transfer, the relief will be recaptured.

Irish stamp duty is not payable on the transfer of shares in a company which is not registered in Ireland except where:

• the shares relate to immovable property situated in Ireland or any interest in such property or;

• the shares in the non-Irish registered company are transferred in consideration for the issue of shares in an Irish registered company.

On liquidation, stamp duty should not arise if the liquidator transfers the assets to the shareholders in specie in respect of their shares.

VAT

VAT operates as a turnover tax on all relevant supplies up to a point of final consumption or deemed consumption. Ireland's VAT regime is dictated by EU legislation with the result that Ireland's VAT regime is broadly in line with the pan-European harmonised system. VAT will not arise if the holding company's activity is limited to the holding of shares as the company will not be deemed to be a taxable person for VAT purposes. Consequently pure holding companies are not required to register for VAT. This means that any VAT incurred (in Ireland or elsewhere) on costs attributable to the holding activities are not recoverable by the holding company. However if the holding company takes a direct or indirect role in the management of subsidiaries and charges a fee in respect of this, such companies are engaged in an economic activity, are considered to be taxable persons and therefore are entitled to deduct VAT incurred (in Ireland or elsewhere) on costs relating to this economic activity only. General costs are eligible for partial VAT recovery by reference to a suitable apportionment calculation.

Other taxes

There are no other (significant) taxes to be taken into account for holding companies.

Tax Treaty Network

Ireland has a large tax treaty network which is continually expanding. The signing of new treaties in 2008 brings to 45 the number of tax treaties signed by Ireland. It is envisaged that more treaties will be signed during 2009 with countries such as Argentina, Singapore, Egypt, Tunisia and the Ukraine. A list of countries with which Ireland has ratified tax treaties and with whom Ireland has signed but not yet ratified tax treaties is included in Appendix A. Pursuant to the Finance (No.2) Act 2008 companies resident in countries with which Ireland have signed but not yet ratified tax treaties will be entitled to avail of any of the exemptions available to companies resident in countries with which Ireland has fully ratified tax treaties. This welcome amendment greatly expands Ireland's network of tax treaties.

Ceasing Operations in Ireland

Migration of residence

A company which is incorporated in Ireland will be regarded as tax resident in Ireland unless;

• the company is treated as resident in a country by virtue of a double tax treaty entered into between that country and Ireland; or

• if the company or a related (50% or more) company has trading operations in Ireland and either

• the company is ultimately controlled (more than 50%) by tax residents of an EU Member State or a country with which Ireland has a double tax treaty, or

• the company or a related company is quoted on a recognised stock exchange of an EU Member State (including Ireland) or a country with which Ireland has a double tax treaty.

For companies which fall within one of the above exceptions and for companies which are not incorporated in Ireland, tax residence is determined by reference to where the central management and control is exercised.

Thus, it may be possible to "migrate" an Irish resident company to another jurisdiction by changing the location of its central management and control. There is no statutory definition of "management and control" and the courts generally place considerable emphasis on where the board meeting of directors are held.

It is important to note that an Irish incorporated company must have a minimum of two directors and at least one Irish resident director (in the case of a company regulated by IFSRA this number increases to two), unless it holds a bond, in the prescribed from, to the value of €25,400.

Exemption from capital gains tax exit charge for companies migrating from Ireland

Irish legislation provides for a charge to capital gains tax for companies ceasing to be Irish resident which own assets at the time of the cessation of residence. The legislation deems the company to have disposed of all its assets, other than assets situated in Ireland and used for the purposes of an Irish trade or used or held for the purposes of an Irish branch or agency, whether at that time or subsequently. The disposal is deemed to take place at market value. The participation exemption is not available to the deemed disposal on migration, however there is an exclusion from capital gains tax for companies of which not less than 90% of the issued share capital is held by a foreign company, which is effectively defined as a company resident in a country with which Ireland has a double taxation agreement.

Liquidation of holding company

On liquidation gains and losses are deemed to be gains and losses of the company and it should therefore be possible for gains arising on the disposal by the liquidator of shareholdings (which meet the necessary conditions) to benefit from the participation exemption and therefore be exempt from capital gains tax.

Distributions to shareholders made on liquidation

Where a shareholder receives a distribution on liquidation such a distribution may be subject to capital gains tax in the hands of the shareholder. It is unlikely that such a distribution to a non-resident shareholder would attract a liability to capital gains tax given the fact that a liability to such only arises on shares deriving their value from Irish minerals or mining rights or from Irish real property.

Conclusion

An Irish resident holding company will be subject to the Irish corporation tax system as well as to Irish VAT and withholding taxes. The Irish corporation tax system is recognised as uncomplicated and is associated with low compliance costs. On the tax side the main factors are therefore; the absence of controlled foreign company legislation and transfer pricing rules, the absence of thin capitalisation rules, the availability of a deduction from interest on monies borrowed to acquire certain shareholding, the capital gains tax participation exemption, the taxation regime for foreign dividends and the extensive tax treaty network.

Furthermore there are many favourable non-tax factors to be considered when examining Ireland as a location for a holding company. These include factors such as Ireland being English speaking, having a flexible labour market, being a common law jurisdiction and being a long established member of the EU. In addition, the Irish government and regulators have both adopted a business friendly approach to Irish holding companies.

These factors make Ireland a destination of choice for many holding companies

APPENDIX 1

List of Countries with whom Ireland has a Tax Treaty that has been signed and are therefore in effect².

• Australia

• Austria

• Belgium

• Bulgaria

• Canada

• Chile (effective from 1 January 2009)

• China

• Croatia

• Cyprus

• Czech Republic

• Denmark

• Estonia

• Finland

• France

• Georgia (signed 20th November 2008 - not yet in effect)

• Germany

• Greece

• Hungary

• Iceland

• India

• Israel

• Italy

• Japan

• Korea

• Latvia

• Lithuania

• Luxembourg

• Malaysia

• Malta (Signed 14th November 2008- not yet in effect )

• Mexico

• Macedonia (Signed 14th April 2008-not yet in effect )

• Netherlands

• New Zealand

• Norway

• Pakistan

• Poland

• Portugal

• Romania

• Russia

• Slovak Republic

• Slovenia

• South Africa

• Spain

• Sweden

• Switzerland

• The Republic of Turkey (Signed on 24 October-not yet in effect)

• United Kingdom

• United States

• Vietnam (Effective from 1 January 2009)

• Zambia

Negotiations for new agreements with Albania, Azerbaijan, Bosnia Herzegovina, Moldova, Serbia, and Thailand have been concluded and are expected to be signed shortly.

Negotiations for new agreements with the following countries are at various stages; Argentina, Armenia, Egypt, Kuwait, Morocco, Singapore, Tunisia and Ukraine. It is also planned to initiate negotiations for new agreements with other countries during 2009.

Footnotes

1 A group means a parent company together with its 75% subsidiaries that are resident in Ireland or another Member State of the EU or an EEA Member State with which Ireland has a treaty.

2 The Finance (No.2) Act 2008 extends the definition of a "relevant territory" (as applied by a number of withholding tax and exemption provisions) to include not only those countries which are members of the EU and countries with which we have concluded a double tax treaty which is currently in force but also to include countries with which we have signed a double tax treaty although not yet ratified. This measure is of use for companies as the mere existence of a treaty with Ireland will be sufficient to avail of the available exemptions and reliefs e.g. the relief for withholding tax on certain payments made to overseas companies. This amendment enhances Ireland's attractiveness as a holding company location.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.