Ireland has a very beneficial tax treaty with China, and when taken in addition to Ireland's favourable holding company tax regime it provides significant opportunities for investment into China via Ireland and from China into Ireland. A combination of the Ireland/China Double Tax Treaty and Irish domestic law can provide for a tax free exit from China in the event of a future disposal.
Ireland/China Double Tax Treaty The treaty which was signed into law in 2000 contains two key tax benefits:
no Chinese capital gains tax on the disposal of Chinese shares; and a reduced rate of withholding tax of 5% on dividends paid from China to Ireland. Capital gains tax withholding - planning opportunity
Withholding tax on capital gains made on the disposal of Chinese shares by an Irish company is zero in all circumstances regardless of shareholding size except where the shares derive their value principally from Chinese real estate. The standard rate in China is 10% and treaty protection is required to reduce it below this rate.
Accordingly when an Irish company disposes of its shares in a Chinese company (subject to the exception referred to above on the disposal of Chinese real estate) no Chinese capital gains withholding tax will apply. In addition, where the Chinese company was trading the Irish company will be able to benefit from the Irish participation exemption from capital gains tax thereby ensuring a tax free disposal. The exemption is available to trading companies and to holding companies.
Where the Chinese company principally derives its value from Chinese real estate then an Irish sub-holding company can also provide an effective exit mechanism. In this instance the disposal of the Irish sub-holding company itself can result in a tax free disposal. This would of course require that the disposal of the Irish company itself qualifies for participation exemption in the parent's jurisdiction.
With the exception of the Chinese tax treaty with Barbados which currently exempts all gains including real estate, the Irish treaty is the only one that reduces the tax on non real estate gains to zero regardless of shareholder size. The Chinese treaty with Mauritius provided for a similar benefit but this was eliminated in 2006 when a new treaty took effect. The Chinese treaties with some countries, including the US, provide a nil rate of withholding tax in non-real estate cases but these...