Ireland performs a unique role on the world stage as an offshore location with an OECD white-listed EU onshore low tax regime, coupled with an Anglo Saxon-style common law system favoured by US general counsel. It is a magnet for cross-border asset finance, including aircraft leasing, asset management (including funds), pharmaceuticals, e-commerce, e-gaming, social networking, IP-heavy industry and tax-neutral cross-border structured finance.
Moreover, since 2009 more than €70 billion ($99.8 billion) of worldwide property-related loans have been consolidated under the auspices of the National Asset Management Agency (Nama). These loans are likely to be the subject of significant transactional activity in coming years and form another type of foreign direct investment involving Ireland.
For many FDI-mature investments into Ireland, spin-outs and M&A opportunities arise. Acquisitions of Irish incorporated companies quoted on Irish and other stock exchanges will be subject to Irish corporate and capital maintenance laws and the Irish Takeover Panel rules. Any acquisition of such corporates should be structured to preserve the likely relatively low corporate tax rate of the target. Competition, regulatory and employment law considerations are also relevant.
Establishment of EMEA hubs
Many US corporates use Ireland as their platform for expansion into the European, Middle East and Africa (EMEA) marketplace. In many instances, where a non-EU multinational company seeks to gain entry to the EU marketplace, it may find itself subject to pan-EU regulation administered by individual EU Member States.
In many instances, approval by the appropriate Irish Regulator may enable the Irish corporate to passport EMEA activities throughout all other EU Member States. This is relevant to corporates involved in banking, insurance, fund management, securities issuers and those e-commerce and social media networks holding personal data.
Irish tax law provides for an Irish corporate that is conducting a trade in Ireland to be taxable at 12.5%. Where the Irish entity has an EMEA trading platform, the Irish corporate is entitled to the protection of Ireland's network of 63 double tax treaties so as to control its exposure to tax in foreign jurisdictions. Advance pricing agreements can be concluded with the Irish tax authorities and its treaty partners to obtain a definitive treatment of the Irish and foreign tax treatment of the Irish entity.
To facilitate the Irish trade, intellectual property needs to be sold, licensed or otherwise made available to the Irish corporate. Where the IP is purchased, it is possible to obtain IP tax amortisation which can, in certain circumstances, reduce the effective tax rate to 2.5%. Other business models hold IP offshore using an Irish incorporated but non-tax-resident company that enters into a cost share and licence agreement with the Irish EMEA platform. This structure enables any increase in value of IP to occur offshore and outside the scope of Irish capital gains tax. Irish withholding taxes on licence fees can be avoided, together with Irish transfer tax at 6% on acquisition of IP.
Irish tax legislation provides mechanisms for foreign-owned Irish subsidiaries to exit the country free of gains tax charges, unlike many other EEA and other jurisdictions.
Securitisation and structured finance
One of the key characteristics of Ireland is that, through the use of double tax treaty exemptions and Ireland's domestic exemption to withholding, it is a jurisdiction by which income can be structured to flow from one country to another through Ireland in a highly tax-efficient manner. Ireland is an onshore alternative to the traditional haven locations.
Ireland is a key location for cross bordered structured finance transactions. Irish tax law includes favourable provisions for qualifying special purpose Companies, or SPCs, who hold and/or manage, or have an interest (including a partnership interest) in "qualifying assets" including, in the case of plant and machinery acquired by the SPC, a business of leasing that plant and machinery. The definition of qualifying assets is broad and includes:
- shares, bonds and other securities;
- futures, options, swaps, derivatives and similar instruments;
- invoices and all types of receivables;
- leases and loan and lease portfolios;
- hire purchase contracts;
- bills of exchange, commercial paper, promissory notes and all other kinds of negotiable or transferable instruments;
- carbon offsets;
- contracts for insurance and contracts for reinsurance;
- commodities (tangible assets other than currency, securities, debts or other assets of a financial nature) which are dealt in on a recognised commodity exchange; and
- plant and machinery.
The main conditions to satisfy, in order to be a qualifying SPC, are that it must be Irish tax resident and the de minimis asset value limit in respect of the first securitisation transaction carried out by the SPC is €10 million.
The SPC is typically taxed in Ireland at a corporation tax rate of 25%. Critically, however, the return paid on certain profit participating loan notes is tax deductible. The net effect is that an SPC can avail of Ireland's double tax treaty network to mitigate foreign tax on income earned by the SPC and avoid withholding tax at a current rate of 20% on interest payments (other than short interest) paid by the SPC to non-residents.
Ireland has domestic law exemptions from withholding tax on interest paid on Quoted Eurobonds or on interest paid by the SPC to a resident in another EU member state or a country with which Ireland has a double tax treaty. Recently introduced legislation (in the Finance Act 2011) restricts the deductibility of profit participating interest payments to circumstances where the interest is paid:
i) to a person who is tax resident in Ireland, for example an Irish regulated fund;
ii) to a pension fund, government body or other tax exempt person resident for tax purposes in a Member State of the European Communities or a jurisdiction which has a double tax treaty having force of law with Ireland, or on completion of the procedures, will have force of law in Ireland (a Relevant Territory);
iii) to a person resident for tax in a Relevant Territory which generally applies tax to foreign source profits, income or gains (without a reduction calculated based on the amount of the payment);
iv) on either a Quoted Eurobond or a Wholesale Debt Instrument; or
v) the interest payment has been subject to Irish withholding tax.
Existing arrangements in place as at January 21 2011 are not affected by these restrictions.
Ireland as a location for asset finance
The Irish tax regime has been a key driver in the growth of the asset finance industry, particularly aircraft leasing. Nine of the world's top 10 leasing companies currently operate in Ireland and approximately half of all leased aircraft are managed through Ireland.
The tax highlights which make Ireland a jurisdiction of choice for asset finance include:
- a corporation tax of 12.5% on trading profits;
- tax depreciation for equipment is allowed to be claimed over eight years (12.5% per annum); this essentially allows for accelerated tax depreciation as the economic life of aircraft is substantially longer;
- no withholding tax is imposed on equipment lease rentals paid to non-residents;
- access to Ireland's extensive double taxation treaty network which generally contains advantageous withholding tax provisions on equipment leasing;
- no charge to Irish stamp duty (transfer tax) arises on the transfer of ownership of aircraft;
- for aircraft lessors, VAT leakage does not arise on aircraft leasing as the aircraft lessor generally enjoys full recovery of VAT on costs associated with the aircraft leasing business;
- through domestic law exemptions, no withholding tax is applied on interest and dividends paid to non-residents located in the EU or a country with which Ireland has a double taxation treaty;
- chargeable gains arising on the disposal of plant and machinery can be included in the company's trading income and are accordingly taxable at 12.5%;
- for a lease-in/lease-out companies which does not qualify for the 12.5% trading rate, the company would be subject to Irish tax at a rate of 25% on its lease profit margin and after deduction of certain revenue expenses relating to the lease (such as audit fees); as the company is not carrying on a trade in Ireland, it would typically be outside the scope of the new Irish transfer pricing regime; and
- recently introduced legislation extended the assets qualifying for securitisation to plant and machinery acquired by the SPC whose business is the leasing of plant and machinery.
Tax-exempt funds
Ireland is one of the principal jurisdictions in Europe for both the servicing of international funds and their domicile. Global Investor Magazine selected Ireland as best offshore centre (outside of the UK) for 2011. The total amount of assets under management in Irish domiciled funds was €987 billion as of May 2011 – an all-time high, and although over 80% of this is held in funds authorised as Undertakings for Collective Investment in Transferable Securities (Ucits), 63% of regulated European alternative funds are domiciled in Ireland, making it the jurisdiction of choice for the hedge fund industry in Europe.
The most commonly cited advantages of Ireland as a funds domicile are its regulatory and legal environment, expertise, tax efficiency and distribution network.
In relation to the regulatory and legal environment, as a member of the EU, the OECD, the Financial Action Task Force and a common law country, Ireland is an onshore jurisdiction that international promoters can feel comfortable with. The Irish regulator (the Central Bank of Ireland) has a strong track record of prudential supervision of Irish investment funds and the regulated firms providing services to them, but has also proven to be adaptable in amending its regulations to ensure they remain appropriate and commercial.
Over 12,000 professionals work in the funds industry in Ireland and since the establishment of the International Financial Services Centre in 1987, a large pool of experienced support professionals including lawyers, tax advisers, consultants and auditors has developed. There are more than 50 authorised fund administrators in Ireland, the majority of which are subsidiaries of large global firms. Many of these firms also have sister companies offering custodial operations. This ensures a broad range of choice of service providers regardless of the type of fund under consideration.
Ireland is an extremely tax efficient jurisdiction for domiciling investment funds. Irish regulated funds are exempt from tax on their income and gains irrespective of an investor's residency, there is no continuing or yearly tax charged on the net asset value of the fund; no Irish stamp duty is applied on the establishment, transfer or sale of units or shares in an Irish regulated fund and no Irish withholding tax is applied to distributions or redemption payments by a fund to a non-Irish resident investor. Ireland has signed up to the EU Savings Tax Directive's information exchange provisions and therefore, unlike certain other EU Member States, it does not need to apply withholding tax on fund distributions to non-Irish resident investors.
Irish funds are distributed in more than 70 countries. As an EU Member State Ireland can authorise funds as Ucits which can avail of a pan-European passport. In addition, funds authorised in Ireland as non-Ucits, for example Qualifying Investor Funds, will automatically be largely compatible with the terms of the Alternative Investment Fund Managers Directive and accordingly will be able to avail of further pan-European marketing possibilities from 2013. Ireland is in the same time zone as London and only one hour removed from mainland Europe. As the business day overlaps to an extent with that of both Asia and the US, this greatly facilitates its use as a centre for fund operations.
Property-related debt acquisitions
Nama has acquired more than €70 billion of loans secured on more than 16,000 properties located primarily in Ireland, the US and the UK. These loans are at a discount of more than 50% to the loans' face value. Nama has now started to sell its loan portfolio.
For a foreign buyer of the loan capital, the debt can be acquired, in certain circumstances, free of Irish stamp duty at 6%.
Withholding tax at 20% on Irish source interest may need to be taken into account by any potential purchaser, although various techniques can be employed to avoid this arising.
Ireland applies capital gains tax to disposals of Irish real estate, irrespective of the tax residence of the vendor.
These extra territorial tax provisions do not apply to non-Irish tax resident sellers of debt acquired from Nama.
An attractive offering
While Ireland's policy of maintaining a low corporate tax rate is influential in generating inward investment, there are many other factors of relevance, including its highly skilled workforce and significant critical mass in key industries, including e-commerce, pharmaceutical, social networking, aircraft leasing and fund management.
With corporates continuing to look to access world debt markets, structuring international debt offering through Ireland will continue to grow apace. Ireland's fund management capabilities are world-renowned and are growing exponentially.
Despite the world economic recession, a combination of these factors ensures Ireland continues to attract significant FDI.
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About the author
John Gulliver is head of the tax group at Mason Hayes & Curran. For more than 20 years, he has advised some of the largest Irish, UK and US groups on the tax structuring of their operations. His clients have included some of the largest enterprises in Ireland and numerous Irish based real estate syndicates with substantial prime commercial properties located in Ireland and the UK.
Gulliver regularly works with US, UK and other foreign tax counsel on behalf of Ireland-based clients. He has advised on inward investment projects and merger and acquisition transactions and his experience includes advising multinational enterprises on using the Irish corporate tax regime to build out their EMEA and world footprint. He has particular expertise in structuring the acquisition of intellectual property hubs using Irish cross-border corporates. |
Contact information
John Gulliver
Mason Hayes & Curran
South Bank House
Barrow Street
Dublin 4
Ireland
T: +353 1 614 5000
F:+353 1 614 5001
E: mail@mhc.ie
W: www.mhc.ie |
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About the author
Emer is the managing partner of Mason Hayes & Curran and a partner in both the litigation and human resources groups. Her practice primarily involves dispute resolution in contentious employment and partnership issues. Gilvarry also conducts litigation for corporates and insurers in the defence of employer liability claims, health and safety, and environmental issues. In addition, she provides corporate compliance and due diligence support in employment and workplace-related issues.
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Contact information
Emer Gilvarry
Mason Hayes & Curran
South Bank House
Barrow Street
Dublin 4
Ireland
T: +353 1 614 5000
F:+353 1 614 5001
E: mail@mhc.ie
W: www.mhc.ie |