Ireland’s attractive tax, regulatory and legal regime, combined with an open and accommodating business environment are all factors which have contributed to the establishment of Ireland as a prestigious location for the headquarters of many multinational companies (MNCs), such as Facebook, Google and Intel to name just a few. Our recent series of blogs which discusses why Ireland is a good place to do business outlines many of the factors which contribute to Ireland’s continuing ability to attract Foreign Direct Investment (FDI) and not all of them are tax related! That said, Ireland’s tax regime is one of the key contributing aspects which has lead to Ireland emerging as one of the favoured onshore locations for the regional or global headquarters of many MNCs. From our experience of working with our International business partners we have outlined below some of the taxation measures available to Irish holding companies:
Participation Exemption for Capital Gains Tax (CGT) on Share Disposal
In Ireland, companies are chargeable to CGT at a rate of 33% on the disposal of capital assets, which includes the disposal of shares. However, legislation provides for an exemption from CGT where:
- The disposing company holds at least 5% of the share capital of the company being disposed.
- The shares were held for a minimum period of 12 months at any time within 2 years prior to the disposal.
- The company being disposed of is resident in an EU/tax treaty country.
- The company being disposed of does not derive its income from land, minerals or rights or assets relating thereto within Ireland.
- The company being disposed of passes a “trading” test at the time of the disposal.
Corporation Tax Exemption for Foreign Dividends and a Foreign Tax Credit System
Where foreign dividend income is earned by an Irish company and such dividend is paid from trading profits, the Irish company may only be liable to corporation tax at the rate of 12.5%. While some foreign dividends may be subject to tax at 25%, a tax liability may not arise due to Ireland’s attractive foreign tax credit pooling system. The tax credit pooling system allows for any tax withheld by foreign countries to be pooled and offset against Irish tax on dividends earned. In addition, if such pooled tax credits are not fully utilised in an accounting period, they can be carried forward for offset against future liabilities on foreign dividends earned. It must be noted that any excess tax paid on foreign dividends which are liable to corporation tax at 12.5% cannot be used against dividends which are liable to corporation tax at 25%.
Tax Credits on Foreign Branch Income
An Irish resident holding company will be liable to corporation tax on its worldwide income, which includes income of a foreign branch. Under such circumstances the foreign branch may be liable to both foreign and Irish tax. To eliminate double taxation arising, Ireland’s tax system allows for an offset of foreign tax paid against the corresponding Irish corporation tax liability. As with foreign dividend income, a pooling system of excess credits is available where the foreign tax exceeds the Irish corporation tax. Also, any unused credits may be carried forward to future accounting periods.
Withholding Tax Exemption
Withholding tax at 20% applies to dividend payments and other profit distributions made by an Irish resident company. There are a number of exemptions available where dividends are paid to certain shareholders including:
- Other Irish tax resident companies
- Companies (and individuals) resident in other EU/tax treaty countries and not under the control of Irish residents
- Non-resident listed companies and their 75% subsidiaries.
Royalty payments can also be made free of withholding tax to companies in the EU or tax treaty countries in certain circumstances including the requirement that such royalties must be paid for “bona fide” commercial reasons and the country of the recipient must also impose a tax on such royalties. For Irish companies receiving royalty income, tax relief may be available for the amount of foreign tax withheld by way of a credit or deduction against the Irish tax liability that may arise.
Double Taxation Agreements
Ireland currently has double tax agreements with 72 countries, 68 of which are in full effect. As you can see from the above tax incentives, such agreements can have the effect of either mitigating or eliminating double taxation between participating countries. This is an important factor considered by MNCs when deciding on a location for their headquarters as many of these companies will have operations throughout the world and can benefit from such double tax agreements.
Other Factors To Consider
As you can imagine there are a wide variety of other non-tax aspects which investing companies take into consideration when deciding on a location for their regional or global headquarters. These factors include language, culture, civil and common law, set up costs, standards of living and workforce. We have seen from our recent blogs that Ireland ranks favourably across each of these aspects which increases our attractiveness for Foreign Direct Investment. If you would like further information on establishing a presence in Ireland you can contact us here.
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