Holding Companies In Ireland

Author:Mr David Lawless
Profession:Dillon Eustace
 
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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 companies 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 companies 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...

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