Ireland: Cross Border Leasing In Ireland

Last Updated: 23 April 1997
INTRODUCTION

Ireland offers attractive fiscal incentives to foreign investors engaged in the international leasing industry. Considerable expertise has been developed by Irish leasing companies and their advisers in arranging international leasing and financing structures.

One of the principal factors assisting this development has been the reduced rate of corporation tax applicable to international leasing activities conducted in either Dublin's International Financial Services Centre ("IFSC") or in the Shannon Airport Zone. The reduced rate is 10% as opposed to the normal rate of 36% [see note 1] and the relief is available until 31st December, 2005. Applications to obtain the relief in the IFSC must be made before 31st December, 2000.

10% TAX - SHANNON AND IFSC

To qualify for the relief, the leasing company must obtain a certificate from the Minister for Finance and comply with the conditions set out in the certificate. The certificate will list the trading activities which will qualify for the relief.

SHANNON

The categories of trading activities that qualify for the 10% tax in the Shannon Airport Zone include:-

    repair or maintenance of aircraft;
    trading operations which will contribute to the use or development of the airport;
    activities ancillary to either of the above.

In practice, a wide range of companies operate in the Shannon Airport zone carrying on activities comprising selling, leasing and hiring aircraft and components to non-Irish residents, as well as other asset financing operations and the provision of financial services.

IFSC

A similar tax regime applies to financial activities carried on in the IFSC. These activities include the provision to persons not ordinarily resident in Ireland of a range of financial services including asset financing and leasing.

The tax certificate may be subject to certain conditions one of which is usually the requirement that a certain number of jobs be created. Where the particular activity of the company obtaining the certificate does not warrant the creation of such a number of jobs, it is possible to obtain a sub-certificate through a principal certificate holder.

Note 1: The 36% rate applies after 1 April 1997. A rate of 38% applies before this date.

NON-IFSC/SHANNON LEASING

The conditions attaching to a certificate to trade from the IFSC or Shannon can in certain cases, mean that the establishment of a leasing company is not a cost-effective proposition. In such instances, Ireland can still provide an attractive base for asset financing and leasing. A double taxation treaty may provide for zero or minimal foreign withholding on lease rentals paid by the ultimate lessee. No Irish withholding applies to lease rentals paid out of Ireland.

An Irish company is entitled to a full deduction for Irish Corporation Tax purposes in respect of rentals going out against rentals coming in. This means that only the margin between sub-lease rentals in and head lease rentals out is subject to Irish Corporation Tax at the standard rate of 36% (or 28% if profits are less than o50,000) [see notes 1 & 2] in a lease-in/lease-out structure.

1.DOUBLE-TAXATION TREATIES

Ireland has developed a network of double tax treaties with approximately 30 countries. Under these treaties, foreign withholding tax on lease rentals, interest, royalties and other payments to Irish resident companies is either reduced or eliminated. An Irish resident company will be taxable only in Ireland on business profits earned in a foreign treaty country if it has no permanent establishment in that country.

2.IRISH WITHHOLDING

Companies operating in Shannon and the IFSC qualifying for the 10% rate of corporation tax, enjoy a general exemption from Irish withholding tax on interest paid to foreign lenders.

Irish companies which do not qualify for the 10% rate of corporation tax are subject to Irish withholding tax, at a rate of 26% [see note 3] on most interest payments made to foreign lenders. If the foreign lender is resident in a country with which Ireland has entered into a double taxation treaty, an exemption or relief from the obligation to withhold on interest may be available.

Irish companies generally are not obliged to withhold tax, lease rentals, dividends or other distributions made to non-residents.

Note 2: A rate of 30% applies to profits of less than o50,000 before 1 April 1997.

Note 3: The 26% rate applies after 1 April 1997. The rate until then is 27%.

3.CAPITAL AND STAMP DUTIES

The capitalisation of a limited (but not an unlimited) company by way of share capital (but not loan capital) involves a charge to capital duty of one per cent of the amount subscribed. For this reason, transactions are often structured so that the leasing company is an unlimited company. Alternatively, the company may be funded by a loan from the parent.

Since title to chattels can usually pass by delivery, the effect of Irish stamp duty on international leasing transactions is minimal provided certain planning principles are followed. Also, there is specific statutory exemption from stamp duty in relation to transfers and mortgages of ships and aircraft, leases of chattels and many financial instruments.

4.V.A.T.

The place of supply of equipment leased for business purposes to a lessee who is resident outside Ireland, is his place of residence. No Irish VAT is therefore chargeable on the lease of equipment by an Irish lessor. One exception to this is where the property leased is a means of transport. In this case, the supply is treated as being made where the lessor is established. The sale or hiring of aircraft used or to be used by airlines operating for reward, chiefly on international routes, is however, zero rated in Ireland for VAT purposes and no actual liability arises. Where Irish VAT is chargeable, this can often be recovered, or indeed avoided if prior Revenue authorisation has been obtained. Typically this happens where the person to whom the service is supplied is entitled to recover the VAT under the foreign trader refund provisions.

A similar zero rating applies to ships the gross tonnage of which exceeds 15 tonnes used for passenger transport, rescue, fishing or other commercial or industrial purposes.

Any Irish VAT charged to the Irish lessor on goods or services supplied to it can generally be recovered by the Irish lessor.

5.CAPITAL ALLOWANCES

A further major tax incentive in establishing a leasing operation in Ireland is the scheme of capital allowances which provide that where a person carrying on a trade incurs capital expenditure on equipment to be used for trading purposes that person is entitled to an allowance for the reduction in value of the equipment due to wear and tear.

Entitlement to claim allowances follows the burden of wear and tear. Allowances are therefore, not necessarily claimable by the owner of the equipment unless he bears the burden of wear and tear. Under an operating lease the burden is usually borne by the lessor. Under a finance lease or a hire purchase agreement where the lease payments account for at least 90% of the value of the asset and there is an option exercisable at the end of the term to purchase the equipment for a nominal amount, it is usually borne by the lessee. It is however, possible for an owner to seek the allowances under a hire purchase agreement in cases where it bears the burden of wear and tear and retains a residual interest in the equipment throughout the term of the lease.

An IFSC or Shannon company qualifying for the 10% rate of tax may claim accelerated capital allowances for plant and machinery used in the course of its trade. These take the form of:-

(a)an initial allowance of 100% of the expenditure incurred for the year in which it is incurred whether or not the asset is in use for the purposes of that trade during that year, or

(b)free depreciation which accelerates normal wear and tear allowances up to a maximum of 100% of the cost of the plant and machinery so that the company has maximum flexibility in respect of the time over which it writes down the cost of such plant and machinery.

Companies other than 10% IFSC and Shannon companies generally cannot claim accelerated allowances. For them, expenditure incurred on both new and second-hand plant and machinery (other than road vehicles) is written down over seven years on a straight-line basis, 15% in each of the first six years and 10% in the seventh year.

A claw-back of allowances will occur upon the sale of a leased asset to the extent that the sale proceeds exceed the tax written down value. The amount will be treated as taxable income in the accounting period when the sale occurred. It may be sheltered by other allowances.

6.CROSS BORDER DOUBLE DIP LEASING

Where an Irish lessor is liable to tax at the reduced rate, the allowances may be of less significance and the transaction may be structured so as to enable the foreign lessee to take advantage of allowances available in its own jurisdiction. Indeed, depending on the tax depreciation rules in the foreign jurisdiction, it may be possible to claim tax depreciation allowances in both jurisdictions. Typically, this would arise where one country grants tax depreciation allowances based on legal ownership and the other country grants them based on economic ownership or alternatively, where the economic ownership rules in the two jurisdictions are different.

A number of cross-border transactions have also been carried out involving Irish based equipment with tax depreciation allowances being claimed by investors in countries such as Germany and the USA as well as in Ireland. The test for tax depreciation allowances in Germany is based on economic ownership and in the United States upon a factual determination of which party has more benefits and burdens of ownership. Under the German General Fiscal Code, assets are generally attributed to the legal owner but if the legal owner is excluded from making use of the economic substance of the asset, a third party may qualify as the economic owner of the asset.

These cross border transactions have tended to involve the foreign investor purchasing either new equipment from a manufacturer and leasing it to the Irish user or, in the case of used equipment, a sale of the used equipment to the foreign investor coupled with a leaseback to the Irish user. Depending on the economics, the transaction may also involve a prepayment of lease rentals and/or a defeasance of part or all of the rental stream.

Scope for double dip transactions may also exist in countries such as France, Italy and Sweden which adopt a legal ownership test for tax depreciation allowance purposes.

A & L Goodbody, is Ireland's largest legal firm providing a comprehensive range of corporate and commercial legal services. The firm has a dedicated Taxation Department comprising experienced specialists practising in corporate and commercial taxation matters. Working with specialists in our Corporate and other departments, we advise inward investors and domestic clients on the full range of taxation issues likely to arise in business transaction.

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.

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