Setting Up Business In Ireland
|Author:||Mr John Ryan and Mark O'Sullivan|
|Profession:||Matheson Ormsby Prentice|
Ireland's recent domestic economic problems have been well documented. Over the past four years the Irish real estate market has softened, the country's main banks have been recapitalised, in some cases nationalised, and a €67.5 billion bail-out from the EU / IMF was required in November 2010 in order to shore-up exchequer finances. However, from an international business perspective, Ireland has never been a better place in which to do business. The downturn has reduced costs for companies locating in Ireland, as commercial property prices are now 60% off their peak, while electricity prices for large users fell by approximately 27% in 20101. Meanwhile labour costs have also been reduced and more capacity exists in the workforce. During this period Ireland's tax offering has remained a constant, and in some cases has been enhanced as the Irish government has continued to beat the drum for further international investment.
In fact, 2011 proved to be a record year for inward investment in Ireland, with 148 new investments by foreign companies and the creation of 13,000 new jobs in Ireland. IBM's 2011 Global Location Trends Report has ranked Ireland as the top destination in the world by quality and value of investments, and listed Ireland as the second-largest per-head recipient of foreign direct investment jobs in 2010. Ireland's position as the top ranked foreign direct investment location in the world, by quality and value of investment, is based on global measures of productivity, knowledge intensity and occupational profile composition represented by wages and skills. This highlights the value and exceptionally strong contribution that foreign direct investment makes towards Ireland's economic development. Irish exports, which play a vital role in the Irish economy, continue to grow. In 2011, total exports increased by approximately 5% to €171 billion – up €8 billion from the previous year. In a report on international trade, HSBC Bank has forecast that Irish exports will surge by a further 71% over the next 13 years, as the global economy expands and demand for technology and pharmaceuticals remains strong.
There are many factors that attract investment and business to Ireland. Although the availability of tax advantages is a strong pull factor in encouraging investors to set up business in Ireland, other factors also strongly contribute to Irelands competitive advantage. The Economist Intelligence Unit recently published a survey entitled "Investing in Ireland: A survey of foreign direct investors" which was commissioned by Matheson Ormsby Prentice ( www.mop.ie/fdi). In the survey the four principal reasons cited by foreign direct investors for investing in Ireland were: access to EU Markets, a competitive corporate tax rate infrastructure, a uniquely talented workforce and the presence of a stable regulatory framework that supports business. The biggest competitive advantage that Ireland has to offer was not its low corporate tax rate or other incentives, but rather its access to the EU market. The survey suggests that investors see Ireland's unique selling proposition as not any one simple factor, but the combination of these benefits that Ireland offers.
That noted, once a company makes the decision to invest in Europe, Ireland's tax infrastructure is a compelling pull factor in deciding where within Europe to invest.
TAX INFRASTRUCTURE IN IRELAND
2.1. Low Corporation Tax Rate – 12.5%
The primary incentive, from a tax perspective, of setting up business in Ireland is Ireland's statutory corporation tax rate of 12.5% for trading activities. The 12.5% rate has been approved by the EU and the OECD and applies to active profits and is not dependent on negotiating or securing incentives, rulings or other tax holidays, which is the case in many other European jurisdictions where a special deal or arrangement needs to be made with the relevant authorities.
The Irish corporation tax regime involves the characterisation of income into two streams, with all trading income (broadly equivalent to active income) taxable at 12.5% and all non-trading income (broadly equivalent to passive income) taxable at 25%.
Practically all active business pursuits will qualify for the 12.5% rate. The 12.5% rate is available to almost all business sectors, making Ireland attractive for all activities. Since the introduction of the 12.5% rate, which is enshrined in statute, it is clear that the latest generation of investors in Ireland, include investors from industry sectors which may not have traditionally considered Ireland as a potential low tax platform. The objective underpinning each investment is to avail of the possibilities presented to unbundle the traditional value chain and locate appropriate profit generating functions in Ireland.
Examples of activities in the traditional value chain which are capable of being unbundled and carried on in Ireland include:
management activities - legal, accounting, human resources, finance and reporting etc; financial activities - cash management, banking, insurance and risk management; e-business - CRM, procurement and distribution, supply chain management, marketing and selling; technical activities - technical support, data management, security; research and/or development activities; ownership and exploitation of intellectual property; and distribution activities. Ireland operates a self-assessment system for most taxes, including corporation tax. Whilst Ireland does not operate a ruling system, a taxpayer can request an opinion from the Irish Revenue Commissioners (the "Revenue") on the tax consequences of a particular transaction in advance of the transaction taking place. The Revenue has an established process where they will give an opinion as to a taxpayer's entitlement to the 12.5% rate. Opinions given by the Revenue are not legally binding and it is open to Revenue officials to review the position when a transaction is complete and all the facts are known. This practice is advantageous however as an investor has clarity on for example the applicable corporation tax rate prior to setting up business in Ireland.
2.2. No Withholding Tax
In general, dividends paid and other distributions made by Irish resident companies are liable to a dividend withholding tax (DWT) at a rate of 20%. However, an exemption from dividend withholding tax applies where the payment of a dividends and other distributions by an Irish-resident company is to a person that is resident in the EU or a jurisdiction which has a double tax treaty with Ireland ("Treaty Country") (see below at 2.3), or to a person which is controlled by such a resident person.
Ireland imposes a withholding tax on patent royalties. However, as a general rule, Ireland does not impose any withholding tax on either interest or royalty payments made by an Irish-resident company to a company resident in the EU or a Treaty Country. In addition, pursuant to an administrative practice introduced in 2010, in most cases, the payment of patent royalties by an Irish company in respect of a "foreign patent" to any non-resident company (irrespective of its location) can now be made free of withholding tax, subject to prior approval of the Revenue. Permission is required in writing from the Revenue in order to make patent royalty payments free...
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