Irish Holding Companies
Following the introduction of a number of key taxation reliefs and exemptions in recent years, Ireland has become a very attractive place for multinational companies to locate a holding company.
The main features that give Ireland a competitive advantage over other jurisdictions are as follows:
- No withholding tax on the payment of dividends by the holding company to EU or tax treaty countries.
- No Capital Gains Tax on the disposal of shareholdings in subsidiaries.
- No transfer pricing, thin capitalisation or CFC rules.
- Tax deductions for interest on borrowings to acquire shareholdings in subsidiaries.
- Favourable treatment on the receipt of dividend income.
- Extensive Tax Treaty network and access to EU Parent-Subsidiary Directive.
Low tax rates for both trading operations and investment activities.
These incentives together with non-tax incentives such as the economic and telecommunications infrastructure, the English speaking population and membership of the EU make Ireland one of the most attractive destinations in Europe for multinational companies.
One of the major advantages that Ireland has over other jurisdictions is the ability to combine the holding company with trading activities such as Shared Service Centre activities, GroupProcurement, Treasury and Research & Development.
Where a dividend is received by an Irish resident company from another Irish resident company, it is classified as ‘Franked Investment Income’ and is exempt from corporation tax.
The Finance Act 2008 introduced a 12.5% tax rate on foreign dividends out of trading profits of companies that are resident for tax purposes in EU Member States (‘EU’) or in countries with which Ireland has a tax treaty (‘DTA’)
Dividends from a company resident in a non treaty state are subject to Irish tax at 25% as are dividends out of profits that are not regarded as trading profits. However, in many cases a credit will be available for withholding tax and underlying tax imposed on the foreign subsidiary, which can have the effect of reducing the Irish tax rate to nil.
A system of onshore pooling applies to allow for a situation where the foreign tax on dividends exceeds the Irish tax.
Foreign tax credit pooling provisions will apply separately to dividends that are taxable at the 25% rate and to dividends that are taxable at the 12.5% rate. Any surplus of foreign tax arising on dividends taxable at the 12.5% rate will not be available for offset against tax on dividends taxable at the 25% rate. However, there will be no restriction in the case of dividends taxable at the 25% rate. Back to top
Capital Gains Tax Exemption
The disposal by an Irish holding company of shares in a subsidiary will be exempt from Capital Gains Tax (“CGT”) where certain criteria are satisfied.
The following conditions must be satisfied before the exemption can apply:
- The holding company must own a minimum of 5% of the shares in the subsidiary. This shareholding must include the right to 5% of the profits of the company and the right to 5% of the assets on a winding up. The minimum holding requirement can also be satisfied where the holding company is a member of a group and the shareholdings of members of the group are taken into account.
- This holding requirement must be satisfied for a continuous 12 month period and the disposal must take place within a two year period after meeting the holding requirement.
- The activity of a subsidiary company must consist wholly or mainly of the carrying on of a trade at the time of the disposal. This requirement can also be satisfied where the business of the holding company and companies in which the holding company has a direct or indirect ownership interest of at least 5%, consist wholly or mainly of the carrying on of one or more trades.
- The subsidiary company must be resident in the EU or a treaty country at the time of the disposal. Subsidiaries located in Ireland will also qualify, but the company cannot derive its value from Irish land, buildings or mineral rights.
The exemption also applies to the disposal of assets related to shares which include options and securities convertible into cash. It is not necessary for the holding company to dispose of its entire shareholding in order for the gain arising on the disposal to be exempt; the gain arising will be exempt once the prescribed holding requirement is met.
It should be noted that losses arising that come within the terms of the CGT exemption are not available for offset against other capital gains.
Dividend Withholding Tax
In general, dividends paid and other distributions made by Irish resident companies are liable to a dividend withholding tax (DWT) at the standard rate of tax (20%). However, the law provides an exemption from DWT for distributions in certain circumstances, which effectively means that the distribution will be paid gross (without deduction of DWT) to dividend recipients. The following exemptions apply to non-resident recipients:
- Persons, other than companies, who are neither resident nor ordinarily resident in Ireland and who are resident for tax purposes in an EU Member State other than Ireland or in a country with which Ireland has a Double Taxation Agreement (“treaty country”). These persons can include superannuation funds and non-resident charities.
- Companies which are resident in a treaty country, but which are not under the control, whether directly or indirectly, of a person or persons who are resident in Ireland.
- Companies which are not resident in Ireland and which are ultimately controlled by persons who are resident for tax purposes in a treaty country.
- Companies the principal class of shares of which are substantially and regularly traded on a recognised stock exchange in treaty countries or EU Member States.
- Non-resident companies which are wholly owned by two or more companies each of whose principal class of shares is substantially and regularly traded on a recognised stock exchange in a treaty country.
The recipient of the dividend must claim the exemption by filing an appropriate declaration with the dividend paying company. Where there is no change in circumstances, this exemption will last for five years. Alternatively, relief may be available by way of repayment in accordance with the provisions of the tax treaties which provide for reduced rate or exemption on dividends.
Controlled Foreign Company (“CFC”) Regulations
Ireland does not have any CFC regulations and therefore it is possible for an Irish company to hold shares in companies that are resident in other jurisdictions and not require the profits of the entity in the other jurisdiction to be repatriated to Ireland. Many other international holding company locations include CFC rules which can limit the range of countries into which they can invest.
Thin Capitalisation Rules
The ability of a holding company to finance its operations by means of borrowings is restricted in many territories due to the imposition of thin capitalisation rules requiring that companies be financed in part by equity. This can limit a company’s ability to expand its operations. Ireland does not have thin capitalisation rules provided that the rate of interest charged does not exceed a reasonable rate. This allows international holding companies to be fully financed through debt. Accordingly a company with a nominal share capital is in a position to fund its operations by unlimited borrowings and the interest on those borrowings is fully deductible.
Among the key attractions for Ireland as a location for investment by multi national corporations is the fact that there is no transfer pricing regime here. The aim of transfer pricing rules is to prevent income from being artificially shifted from a country with a high corporation tax rate to a lower tax jurisdiction. The income is moved to the low tax jurisdiction by having a related company in the low tax jurisdiction supply goods or services to a related company in the high tax jurisdiction at artificially inflated prices. The effect of transfer pricing rules is to deem the transaction to have occurred at fair market value consideration so as to remove the tax benefit achieved through the use of artificially high transfer prices.
It is possible to get a deduction for interest incurred on borrowings which are used to invest in trading operations, or holding companies of trading operations, both in Ireland and overseas. The interest relief is granted on a paid basis against a company’s total profits.
Interest will be treated as a distribution and not deductible for tax purposes under Irish tax legislation where;
- It is paid outside the EU to non-resident parent companies, or
- To non-resident companies where there is 75% common control
However, the interest will be deductible in most situations where it is paid to a company resident in a tax treaty country.
Transfer of Residence
It is possible in certain limited circumstances for a company to remain incorporated in Ireland, but to have its residence transferred offshore. However, this can only apply where:
- The company, or a related company, carries on a trade in Ireland and either the company is ultimately controlled by persons resident in an EU state or in a treaty country or the company or a related company is a quoted company, or
- The company is not regarded as resident in this state under the terms of a taxation treaty between Ireland and another country. A company is subject to capital gains tax on the transfer of its residence from Ireland i.e. there is a deemed disposal and acquisition of its assets. The CGT participation exemption may be available to eliminate this liability. An exemption is also available where the company is migrating its residence to a tax-treaty country and various other conditions are satisfied.
- Capital duty on the issue of share capital was abolished with affect from 7th December 2005.
- Stamp duty on the transfer of intellectual property (previously taxed at a rate of 9%) was abolished in Finance ACT 2004. Intellectual property includes any patent, trademark,copyright, domain name, design right etc.
Tax Rates For Irish Companies
All companies resident in the State and all non resident companies which carry on a trade in the State through a branch or agency, subject to specific exceptions, are liable to corporation tax.
The following rates apply:
- Standard rate on Trading Income 12.5%
- Passive income – Investment/Rental Income 25%
- Special rate for dealing in residential land 20%
12.5 % Rate
To qualify for the 12.5% rate on trading income a company must be able to demonstrate that it has substance in Ireland and is carrying on an economic activity here. It is important that the company is not just a brass plate operation but can show a physical presence in Ireland and have employees engaged here.
Where an Irish company carries on a trade partly in Ireland and partly abroad the trading profits will normally be taxed at the 12.5% rate. Where an Irish company carries on a trade wholly outside of Ireland then the profits will be taxed at the 25% rate.
The 25% rate applies to investment income, rental income and income from the following excepted trades:
- Dealing in land which has not been fully developed (other than residential land), but not any part of such trades which consists of construction operations.
- Working minerals, and
- Petroleum activities whether exploration, extraction activities or acquisition, or exploitation of petroleum rights.
A special corporation tax rate of 20% applies to profits made from dealing in residential development land.
Incorporating An Irish Company
Any person may form an incorporated company by subscribing his/her name to a Memorandum of Association and complying with the requirements of the Companies Acts
A company incorporated in the State must have at least one director resident in the State or alternatively the company must provide a bond to the value of €25,395.
The bond can be avoided if the company holds a certificate from the Registrar of Companies stating that the company has a real and continuous link with one or more economic activities that are being carried on in the State. The Registrar will only grant such a certificate on receipt of proof of such a link. A statement from the Revenue Commissioners that the Revenue Commissioners have reasonable grounds to believe that the company has such a link shall be deemed to be such proof. Alternatively we can provide Irish resident professional directors to act for the company.
The following are the various types of company that can be formed.
Private Company Limited by Shares
The liability is limited to the amount, if any, unpaid on the shares held by its members.
Private Company Limited by Guarantee having a Share Capital
The liability is limited to the amount the members have undertaken to contribute to the assets of the company in the event of its being wound up, in addition to the amount, if any, unpaid on the shares held by the members.
Unlimited Company – Public/Private
The liability of the members is unlimited.
Public Limited Company
A public limited company is limited by shares. It must have at least seven members and a minimum nominal capital of €38,092.
Public Company Limited by Guarantee and not having a Share Capital.
The liability is limited to the amount its members have undertaken to contribute to the assets of the company, in the event of its being wound up.