In recent years Ireland has become a very attractive place for international companies to locate a holding company. Because of attractive tax, legal and regulatory framework, combined with an open and accommodating business environment, Ireland’s status as a world-class location for international business is well established. Very often the preferred method of accomplishing these aims has been either through the relocation of the tax residence of a parent or holding company to Ireland or the incorporation of a new parent or holding company in Ireland.
A company that is resident in Ireland is liable to Irish corporation tax on its worldwide profits and not just in respect of Irish source profits. A company that is merely incorporated in Ireland is not automatically treated as resident here if it is controlled by shareholders who are resident in another EU State or in a country with which Ireland has a tax treaty.
However, the key determinant for tax residency is the “central management and control” test. In essence this means that a company is resident in Ireland if the strategic decisions concerning it’d activities and operations are exercised here. Some of the factors that can generally be expected to be of relevance in determining the central management and control include:
- Where are the important questions of company policy and critical decisions determined?
- Where do the majority of directors reside?
- Where are the board meetings held?
- Where is the negotiation of major contracts undertaken?
The main tax advantages for Irish resident holding companies include:
Capital gains tax participation exemption on disposal of qualifying shareholdings; Qualifying shareholdings are greater than or equal to 5% in companies resident in an EU member state/double tax agreement partner country. 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.
- Effective exemption for foreign dividends via 12.5% tax rate for qualifying foreign dividends and flexible foreign tax credit system. 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’).
- Double tax relief available for tax suffered in foreign branches and pooling provisions for unused credits. Where (i) the Irish company receives foreign branch income, and (ii) the foreign tax suffered exceeds the Irish tax on the foreign branch income, then the excess may be set-off against Irish tax on other foreign branch income of the Irish company in the year concerned.
- Dividend withholding tax can be avoided in certain circumstances including where the recipient is resident in an EU member state or a tax treaty partner country. Amongst the circumstances included are: (A) 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 and (B) Companies which are not resident in Ireland and which are ultimately controlled by persons who are resident for tax purposes in a treaty country. In addition persons who are not resident nor ordinarily resident in Ireland but are resident in an EU state or tax treaty country than be paid gross with withholding tax providing certain compliance procedures are met.
- Transfer pricing. Up to recently there were no transfer pricing rules in Ireland. However new rules have been introduced to ensure that arm’s length prices apply to transactions between associated persons, thus ensuring the full profit is taxed in the country receiving the income. The rules do not apply to small and medium sized enterprises (less than 250 employees, with turnover below €50m or assets below €43m). Effective 1 January 2011 as respects transactions agreed on or after 1 July 2010.
- 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.
One of the major advantages of Ireland as a holding company location is the ability to combine the holding company with trading activities such as shared services, group administration, purchasing treasury and research and development.