Doing Business in Ireland - Taxation and Company Law
IntroductionThere has been a lot of publicity recently about foreign companies (including Shire, and United Business Media) intending to relocate their holding companies to Ireland.
In addition a lot of leading international companies have chosen to locate their trading and/or R&D operations in Ireland in recent years.
The tax rules and incentives relevant to companies operating from Ireland are summarised below.
Corporation Tax
An Irish resident company is subject to Irish tax on its worldwide income and gains. Non resident companies are taxed on Irish source income, subject to double taxation relief.
Income from a trade carried on in Ireland is taxed at 12.5%. Investment income, and income from a foreign trade is taxed at 25%.
The distinction between trading and investment income can be unclear in some cases (e.g. aircraft leasing, licences) and whether the 12.5% tax rate can be availed of will usually depend on the presence of employees in Ireland and their role.
The recent ECJ decision in the case of Cadburys Schweppes v Inland Revenue effectively endorsed the current low tax regime for companies trading in Ireland.
Income Tax
An Irish resident and domiciled individual is subject to tax on his worldwide income and gains. An Irish resident but non domiciled individual is subject to tax on his Irish and UK income, and remittances from other countries.
Income tax is charged at 20% on the first €36,400 per annum, and 41% on the excess.
Employees social insurance / levies are charged at 7% on the first €52,000 and 2% on the balance. Employers social insurance contribution is charged at salaries of up to €18,980 per annum, a rate of 10.75% applies to salaries in excess of this amount.
Capital Gains Tax
Irish resident individuals and companies are subject to capital gains tax at 22% on gains arising on the disposal of assets worldwide. Non residents are only subject to Irish CGT on the disposal of property located in Ireland.
VAT
Value added tax is charged at the following rates:
| Exempt | e.g. medical & financial services, |
| 0% | e.g. most food & drink (excl alcohol), medicines, |
| 13.5% | e.g. property, restaurant & hotel meals, |
| 21.5% | everything not subject to VAT at the lower rates. |
The registration thresholds are €37,500 for the supply of services and €75,000 for the sale of goods.
Stamp Duty
Stamp duty is charged at rates of between 1% and 9% . Transfers of commercial property valued in excess of €100,000 are subject to duty at 6%.
Share transfers are subject to duty at 1%.
IRELAND AS A LOCATION FOR FOREIGN INVESTORS
Company Residence
A company is treated as Irish resident for tax purposes if it is incorporated in Ireland or if it is managed and controlled from Ireland.
However, a company incorporated in Ireland will not be treated as Irish resident if it is resident elsewhere under the terms of a double taxation agreement.
Every Irish incorporated company is now required to have either an Irish resident director, or provide a bond of €25,000. This bond will be lost if the company fails to comply with certain company law and tax requirements.
Holding Company Regulations
There are no minimum equity requirements or thin capitalisation regulations for Irish companies. A company may therefore be financed entirely by way of loan capital.
Accounts can be prepared in any currency thereby removing the exchange risk of an Irish resident company trading with say the UK or the US.
A company can have just one shareholder. At present there is a requirement for two directors however there are proposals to change this in the near future.
Interest on funds borrowed to loan to, or acquire shares in a trading subsidiary is tax deductible.
Controlled Foreign Companies Regulations
Approximately 26 OECD countries currently have controlled foreign companies regulations. These rules seek to tax companies on the passive income (e.g. royalties, rents, interest etc) earned by foreign companies they control, where those companies are located in tax haven countries.
Ireland does not have controlled foreign companies regulations and therefore an Irish holding company will not be taxed on the imputed income of a foreign subsidiary, even if that subsidiary is located in a tax haven.
Taxation of Dividend Income
The foreign dividend income of an Irish holding company is subject to corporation tax at 12.5% in the case of dividends derived from trading profits. Foreign dividends derived from non trading profits are subject to tax at 25%.
There are three different types of relief available in respect of foreign tax already paid on foreign dividend income.
Ireland has adopted the credit method of tax relief under the EU Parent Subsidiary Directive. Therefore if an Irish resident holding company receives a dividend from another EU country, credit relief will be allowed in respect of foreign tax already paid on that income (i.e. underlying tax). To avail of this relief there must be at least a 5% shareholding relationship.
Under Double Taxation Agreement provisions, relief is given for withholding tax and underlying tax in respect of dividends received from a treaty country. Ireland currently has Double Taxation Agreements with more than 40 countries (schedule attached).
Ireland also operates a system of Unilateral Credit Relief in respect of dividends received from 5% subsidiary companies in treaty and non-treaty countries. Credit relief is available in respect of the underlying tax paid by subsidiaries companies.
Credit pooling is available whereby excess credits (i.e. where the underlying tax exceeds 12.5% - 25%), can be set against tax payable on other foreign dividends. Alternatively excess credits may be carried forward for use in future years.
Taxation of Capital Gains
An Irish resident company is subject to capital gains tax at 22% on its worldwide gains, even where the proceeds are not remitted to the state. However, the profits arising on the sale of shares in a subsidiary by an Irish resident holding company are exempt from capital gains tax provided:
- The holding company has at least a 5% interest in the subsidiary for a 12 month period in the 2 years preceding the sale.
- The subsidiary company is resident in a EU or Double Taxation Agreement (DTA) state.
- The subsidiary is a trading company or part of a trading group.
Repatriation of Dividends from Ireland
Dividends paid by an Irish resident company are subject to withholding tax of 20%. However withholding tax does not apply where the:
- The dividend is paid to an EU or DTA resident individual or company.
- The dividend is paid to a company under the control of persons resident in an EU or DTA country.
- The dividend is paid to a company (or the subsidiary of a company) listed on a recognised stock exchange.
- The dividend is paid by a subsidiary to its 5% parent company (EU Parent-Subsidiary Directive).
WHY LOCATE IN IRELAND?
Remittance Basis
Irish resident but non domiciled individuals are subject Irish taxation on their Irish and UK income and foreign remittances only. Therefore non domiciled individuals can reside in Ireland tax-free by living off capital only, and ensuring income is accrued overseas.
Research & Development
Companies carrying out research and development activities in Ireland can claim a credit of 25% of the incremental annual expenditure on R&D, as well as 20% of the cost of buildings and equipment used (in addition to capital allowances). Unused credits can be group relieved or carried forward indefinitely.
Patent royalty income is exempt from corporation tax where the research and development has been carried out in Ireland, otherwise it is taxable at 12.5% (as trading income) or 25% (as investment income).
Patents / Licences
Manufacturing companies in high tax locations can reduce their overall tax burden by locating their patents and licences in Ireland. Patents and licence fees paid to Ireland will be tax deductible in the country where the manufacturing takes place, and only subject to tax at 12.5% in Ireland.
International Leasing
Where the financing and negotiating of international leasing deals (e.g. aircrafts) is carried out in Ireland and the income is paid to an Irish resident company, the income will be subject to tax at 12.5%.
Holding Companies
Due to generous double taxation relief, profits can effectively be paid tax free to holding companies located in Ireland while profits on the sale of trading subsidiaries are exempt from capital gains tax.
Dividends can be paid free of withholding tax to shareholders resident in EU or DTA countries. If the shareholder is resident in a tax haven, the Irish holding company could be liquidated and the proceeds paid out free of CGT.
Other incentives
Generous tax incentives are available for investments in the film industry, renewable energy, woodlands, nursing homes, childcare, certain disadvantaged areas.
Exemptions from tax are available for income from stallion services, or works of artistic merit (e.g painting, writing, musical compositions), however these have been capped at the first €250,000 of income per annum with effect from 2007.
Grants are available to foreign investors in Ireland in respect of capital, employment, R&D, and training costs, more information is available at www.IDAIreland.com.
TAXATION OF IRISH HOLDING COMPANY EXAMPLE
Structure
| € | |
| Profits in EU Trading Company say | 1,000,000 |
| Foreign Corporation tax at say 30% | (300,000) |
| Dividend to Irish Holding Company | 700,000 |
| Foreign Withholding tax (WHT) | NIL |
| Net dividend | 700,000 |
| Irish Tax on Dividend | |
| Net Dividend | 700,000 |
| Addback: Underlying tax | 300,000 |
| Deemed dividend | 1,000,000 |
| Irish tax at 12.5% | 125,000 |
| Credit for underlying tax / WHT | (300,000) |
| Irish tax payable | NIL |
| Dividend to Shareholders | |
| Gross dividend | 700,000 |
| Irish Withholding Tax | NIL |
| Net Dividend | 700,000 |
REPUBLIC OF IRELAND DOUBLE TAXATION AGREEMENTS
- Australia
- Austria
- Belgium
- Bulgaria
- Canada
- Chile
- China
- Croatia
- Cyprus
- Czech Republic
- Denmark
- Estonia
- Finland
- France
- Germany
- Greece
- Hungary
- Iceland
- India
- Israel
- Italy
- Japan
- Korea (Rep of)
- Latvia
- Lithuania
- Luxembourg
- Malaysia
- Mexico
- Netherlands
- New Zealand
- Norway
- Pakistan
- Poland
- Portugal
- Romania
- Russia
- Slovak Republic
- Slovenia
- South Africa
- Spain
- Sweden
- Switzerland
- United Kingdom
- United States
- Zambia