Ireland: Fiscal Incentives for Inward Investment

Last Updated: 25 November 1998
1. Introduction

Since 1980, over 40% of all US new inward investment in European electronics has come to Ireland.

Eight of the World's top 10 independent software companies have major operations in Ireland and over 40% of all PC package software and over 60% of business application software sold in Europe is produced in Ireland.

Nine of the World's top 10 pharmaceutical companies and 10 of the World's top 15 medical products companies also have significant operations in Ireland.

The I.T. sector and the pharmaceutical sector now account for over 50% of Ireland's exports. Additionally, Ireland has become Europe's leading location for call centres and has also established a highly successful international financial services centre.

The reason for Ireland's attractiveness to multi-nationals setting up operations in Europe is due to a number of factors. The most important of these is probably the 10% corporate tax rate followed then by the availability of generous grants that are made available towards start-up costs.

Additionally, Ireland has an abundance of well-educated young people available to meet multi-nationals' staffing needs. The costs of operating in Ireland, including employment costs, also tend to be lower than in most other European companies and Ireland also has an advanced telecommunications system.

2. The 10% "manufacturing rate" of Corporation Tax

Income from the sale of goods manufactured in Ireland is liable to Irish corporation tax at the rate of 10%. There are three classes of "manufacturers" entitled to the benefit of the 10% rate:

a. companies manufacturing goods within Ireland;

b. companies selling goods which are manufactured within Ireland by a 90% subsidiary, a fellow 90% subsidiary or a 90% parent company; and

c. companies which subject goods belonging to another to a manufacturing process in Ireland.

There is no statutory definition of "manufacture" and the broad test that has been applied is that the final product must be distinct from the materials used in the processes. The Irish courts have, in a number of cases, interpreted the word "manufacture", for the purpose of the relief, quite liberally.

Over the years, the 10% rate of corporation tax has been extended by legislation to a wide variety of activities which would not ordinarily constitute manufacturing. These include the following:

a. the performance in Ireland of certain professional services related to engineering works executed outside the European Union;

b. the provision of "computer services" being;

  • data processing services,
  • software development services, or
  • technical or consultancy services which relate to either or both processing services and software development services

the work on the rendering of which is carried out in Ireland in the course of a service undertaking for which an employment grant has been provided by the IDA, the Shannon Development Authority or Udaras na Gaeltachta.

Eligible for relief under this category are activities comprising not just the traditional computer services activities also telemarketing, teleservice and software support centre activities, central reservation centres and other data processing/collecting operations.

a. certain trading activities carried out in the Shannon Free Zone;

b. certain trading activities carried out in the Dublin International Financial Services Centres ("IFSC");

c. the remanufacture and repair of computer equipment or of sub-assemblies where such equipment or sub-assembles were originally manufactured by the same company or a company connected with the company carrying on the remanufacturing or repair;

d. wholesale sales by special trading houses of goods manufactured in Ireland;

e. the maintenance or repair of aircraft engines or components carried on within Ireland;

f. the production of qualifying films in Ireland;

g. certain shipping activities;

h. the production of fish on a fish farm within Ireland;

i. the cultivation of plants by the process of plant biotechnology known as micro-propagation or plant cloning;

j. various meat processing operations;

k. the selling by wholesale in the course of carrying on a trade by an agricultural or fishery society of goods purchased by it from agricultural societies or fishery societies which are its members where those members are entitled to the manufacturing relief in respect of those goods;

l. the sale by an agricultural society to a qualifying company of milk purchased by the society from its members;

m. the production of a newspaper including the rendering of advertising services in the course of the production of the newspaper.

Excluded from the benefit of the 10% tax are retail sales, agricultural goods ultimately sold to the intervention agency of the European Union, the building industry, mining operations which do not involve manufacturing and certain other excluded activities.

3. The Dublin International Financial Services Centre

The 10% tax has also been extended to income arising from the carrying on in the Dublin IFSC of qualifying financial service activities. A broad range of financial service activities are eligible for relief but most of the activities carried on by companies in the IFSC tend to fall within one or more of the following categories:

a. Asset Financing and Leasing - while all forms of financing are conducted, aircraft and ship leasing is particularly prevalent. Leasing not just qualifies for the 10% tax but also qualifies for accelerated depreciation allowances and no withholding tax on lease-rental in addition to access to Ireland's double tax treaty network.

Funds - The IFSC is now one of Europe's leading mutual funds centres. This has been the impetus for the development of a large network of service providers in the form of fund managers and fund administrators. The management of funds and funds administration in the IFSC qualifies for 10% tax. The funds themselves (whether in the form of UCITS, unit trusts, variable capital companies or limited liability partnerships), provided they satisfy certain conditions, are tax transparent and do not attract any Irish tax. Likewise, non-resident holders of units in such funds are not liable to Irish tax.

Insurance - this sector has also grown rapidly in the IFSC and comprises operations involved in life and non-life insurance, captive insurance management, re-insurance activities and back office operations.

Treasury - Under this category are a significant number of financing companies established in the IFSC either on a stand-alone basis or either as an agency treasury company or captive finance company.

Banking - A number of companies have established full banking operations in the IFSC involving international banking, asset financing, treasury management and bond issuance.

The IFSC has also become an attractive location for securitisation vehicles and for the issuing of Euro commercial paper and medium term note programmes. One of the primary attractions of the IFSC in this regard is a domestic exemption from withholding tax on interest payments to non-residents which is not dependent on the existence of a double tax treaty.

4. Shannon Free Zone

Certain trading activities within the Shannon Free Zone are also eligible for 10% tax. These activities are:

a. the repair or maintenance of aircraft;

b. trading activities in regard to which the Minister for Finance is of the opinion, after consultation with the Minister for Transport, that they contribute to the use or development of the Shannon Free Zone;

c. trading activities which are ancillary to either of the above or to any operation consisting of the manufacture of goods.

The aviation related activities that qualify for the 10% tax in Shannon include aircraft maintenance and repairs, aircraft spare parts distribution, aircraft financing and aviation consultancy. Activities which qualify for the 10% tax in the IFSC also qualify for the 10% tax in Shannon. Apart from all of those activities, a wide range of other activities such as inventory control and management, distribution and fulfilment and telemarketing and customer support activities also qualify for the 10% tax. Of particular note too is the ability to set-up a company in Shannon to exploit and manage intellectual property rights from Shannon and to set up franchising operations.

Customs duty and value added tax advantages also exist in setting up in the Shannon Free Zone.

5. The Future of the 10% Tax

IFSC projects and Shannon projects qualify for the 10% tax until the end of 2005. Companies qualifying for the manufacturing relief (other than IFSC and Shannon and special trading houses) can claim the 10% tax until the end of 2010.

In recent years, the international business community has been seeking from the Irish Government a degree of certainty as to the corporate tax position in Ireland post 2005/2010. In the last 12 months the Government has announced its intention to reduce the standard corporate tax rate from its present level (currently 32%) to 12.5% by the end of the year 2005. The Government also indicated that this 12.5% rate would apply to active income with a higher rate of 25% applying to passive income with effect from that date.

These proposed tax changes have been (and are continuing to be) the subject of intense negotiations with the European Union. While it has yet to be officially confirmed, it is understood that the 12.5% rate may be introduced by January 2003 (with the present rate of corporate tax expecting to reduce by 4% between now and 2003). Furthermore, it is understood that a limit may be imposed on the number of projects to be approved for the 10% tax between now and then. Limits which have been mentioned are that only 67 projects will be approved in each of the calendar years 1998 and 1999. Thereafter, no projects will be eligible for approval for the 10% tax.

To summarise therefore, if the above position is confirmed by the Government, manufacturing projects and IFSC/Shannon projects which have already been approved will qualify for the 10% tax until the end of 2010 and 2005 respectively. Thereafter those projects' trading income will be taxed at the rate of 12.5%.

Manufacturing and IFSC/Shannon projects that have yet to be approved but are approved before the end of 1999 will qualify for the 10% corporate tax rate until 2003 with the 12.5% rate applying to their trading income from 1st January 2003 onwards.

Projects that are not approved for the 10% tax before the end of 1999 will be taxed at the standard rate of corporation tax (which of course is to reduce incrementally to 12.5% by 1st January 2003) on their income. It should be stressed that this has not yet been confirmed by the government and the final position may be different to the above. It is expected that the European Commission will approve an agreed package on the tax changes on 22nd July, 1998.

6. Other Tax Incentives

Other features of the Irish tax code which act as incentives in attracting inward investment to Ireland include the following:

a. Tax Free Repatriation of Profits - Ireland does not operate a withholding tax on the repatriation of branch profits or on the payment of dividends by an Irish resident company to a non-resident. Advance corporation tax is payable on dividends paid by Irish resident companies but dividends paid to a 75% parent resident in a treaty country are exempt from ACT. ACT is being abolished in full with effect from 6th April 1999.

b. Double Tax Agreements - Ireland has an extensive network of double tax agreements most of which enable interest and royalties to be received by an Irish resident company free of withholding tax in the country of source. Additionally, some of the treaties contain provisions preserving the benefit of the 10% corporation tax in the home jurisdiction either by way of a participation exemption or a tax sparing provision.

c. Unilateral Credit Relief - where a double tax treaty does not exist between Ireland and a source company, any taxation paid in that source company will generally be allowable in Ireland under the terms of a unilateral credit provision.

d. Capital Allowances - a system of tax depreciation allowances exists in Ireland in connection with capital expenditure incurred on plant and machinery and on industrial buildings. In the case of plant and machinery, this is generally at the rate of 15% per annum (with 10% in the seventh year) on a straight line basis and at the rate of 4% per annum in the case of industrial buildings. Accelerated capital allowances may be available in certain instances.

e. Patent Income Exemption - royalties and other sums paid in respect of the use of an invention to which a qualifying patent (i.e. one in relation to which the research, planning, processing, experimenting, testing, devising, designing, developing or similar activity leading to the invention which is the subject to the patent was carried out in Ireland) relates is exempt from taxation in Ireland if certain other conditions are satisfied. The royalties must be arms-length and be paid for the purposes of a manufacturing activity (or one which would qualify for manufacturing relief if carried on in Ireland) or alternatively be paid by a person who is not connected with the beneficial recipient of the royalty.

f. Expenditure and Scientific Research - expenditure on scientific research may be claimed against the profits of a company. For certain qualifying companies, there is a quadruple deduction for qualifying incremental R&D expenditure above a fixed base subject to various limits.

g. Foreign Branch Tax Exemption - profits from foreign branches of an Irish resident company will be exempt from tax in Ireland provided a substantial permanent capital investment is made in Ireland on foot of an approved investment plan involving the creation of substantial new employment in Ireland.

7. Grants

Financial supports in the form of grants are available for the establishment of projects in Ireland by multi-nationals. These include capital grants towards the cost of fixed assets and are available to companies to defray the cost of setting up an operation.

Employment grants are also available and are geared towards companies which create employment but do not need to invest heavily in fixed assets. An amount is generally agreed for each job to be created with one half of the agreed amount per job being paid on certification that the job has been created and the balance one year later, provided the job still exists.

Also available may be training grants towards the cost of training workers and management for new industries and research and development grants for feasibility studies or product development.

This article was intended to provide general guidelines. Specialist advice should be sought about specific facts.

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