The Irish Finance Act 2004 contained a number of measures aimed at increasing the attractiveness of Ireland as a corporate headquarters and holding company (HoldCo) jurisdiction. These new measures provided for an exemption from corporation tax on gains arising on the disposal of qualifying shares, and a wider double tax relief for foreign taxes levied on dividends received by an Irish resident company. These measures were subject to clearance from the European Commission, which was received on September 23 2004, and the relevant Commencement Order to bring the measures into effect from February 2 2004, which has been issued.
Criteria for attractive HoldCo location
The location of choice for a HoldCo will depend both on tax and non-tax considerations; it should offer something more than merely a low rate of tax. The main criteria that make a jurisdiction attractive as a HoldCo location are:
- Ability to dividend income from a subsidiary to HoldCo free from withholding tax.
- Ability to declare a dividend from HoldCo without incurring withholding tax.
- No additional tax on dividend income in HoldCo jurisdiction for dividends received.
- No capital gains tax on disposal of shareholdings in subsidiaries.
- Tax deduction available for borrowings to acquire shareholdings.
Ireland has been to the forefront in achieving an attractive tax regime for trading activities, but it has lagged behind in terms of improving its status as a HoldCo regime. Before the Finance Act 2004, Ireland featured strongly in respect of criteria 1, 2, and 5, and to an extent in respect of criterion 3. The changes introduced by the Finance Act 2004 have increased Ireland's competitive advantage as a HoldCo location.
Tax exemption from gains on sale of shares
The Finance Act 2004 provided that gains and losses arising on disposal of qualifying shares by an Irish resident company will be ignored for the purposes of corporation tax on gains. The exemption also applies to a disposal of assets related to shares (which includes options and securities convertible into shares). Certain conditions must be satisfied before the exemption can apply.
As currently drafted, the Finance Act 2004 provides that the Irish resident holding company (the investor company) must have either a minimum 10% shareholding in the investee, with a market value of at least €15 million ($18.7 million), or a 5% shareholding with a market value of at least €50 million. Not only must the investor company satisfy the percentage shareholding requirement, but it must also be beneficially entitled to a minimum of 10% or 5% (as the case may be) of both the investee's profits available for distribution, and investee's assets available for distribution on a winding up. This 10% or 5% requirement must have been met for a continuous period of at least 12 months within the previous 24 months. To address a number of concerns expressed by the European Commission, the monetary thresholds and differing percentage shareholding requirements will be removed and replaced with a flat 5% shareholding requirement. These amendments will be made in the Finance Act 2005, subject to the approval of the Irish Houses of Parliament. However, the timing implications of the amendments to be made are unclear.
At the time of disposal, the investee company must be carrying on a trade or, alternatively, the test may be satisfied on a group basis. The investee company must not derive its value from Irish land, buildings, minerals or any rights relating to mining or minerals. Lastly, the investee company must be resident in the EU (including Ireland) or a country that has entered into a double taxation treaty (DTT) with Ireland.
An optimal HoldCo location would have a complete exemption from tax on dividends received. However, Ireland operates a credit system as opposed to a participation exemption. The Finance Act 2004 introduced a system of pooling tax credits onshore to deal with the situation where foreign tax on some dividends exceeds the Irish tax payable while on other dividends the foreign tax is below the Irish tax liability. Previously, any credit that exceeded the Irish tax liability attributable to that particular dividend would be lost. The new provisions allow excess credit to be offset against Irish tax on other foreign dividends received in the accounting period concerned. This applies to dividends from all countries and not just EU/DTT countries. The credit system applies where the Irish holding company holds 5% of the voting power in the relevant subsidiary (previously this was 25%).
The Irish system permits a credit for foreign underlying tax, which includes corporation tax levied at state and municipal level on the profits out of which the dividends are paid and also withholding tax applied to the dividend paid. The revenue commissioners have confirmed that the credits extend to state taxes and city taxes in the US. The rate of taxation on foreign dividends received in Ireland is 25%. Therefore, to the extent that credits received for foreign tax equal or exceed the Irish rate of 25%, there will be no tax payable. In addition, unused credits can be carried forward indefinitely and offset similarly in subsequent accounting periods. This should ensure that, with appropriate planning, no Irish tax will arise on foreign dividends in most instances.
Ireland offers other benefits
Withholding tax exemption for interest
Generally, yearly interest paid by a company in the ordinary course of its trade or business to a company that is resident for tax purposes in an EU member state (other than Ireland) or DTT country will not attract withholding tax.
Exemption from capital gains on migration
If an Irish resident company migrates its tax residence from Ireland, normally a capital gains tax exit charge of 20% applies. Assuming HoldCo has assets other than shares (so the corporation tax exemption from gains is not in point) an exemption from the exit charge is available if 90% or more of the shares in HoldCo are held by one or more foreign companies or by persons who are controlled by one or more foreign companies. A foreign company is a company that is not resident in Ireland, is under the control (that is, more than 50%) of residents of countries with which Ireland has a tax treaty, and is not under the control (more than 50%) by persons not so resident.
No thin-capitalization/transfer pricing/CFC rules
Irish tax legislation does not contain any thin-capitalization provisions, detailed transfer pricing legislation or controlled foreign company rules.
Double tax treaty network
Ireland has an extensive tax treaty network covering all the main trading nations in the world.
As the European Commission has now confirmed the Finance Act 2004 HoldCo provisions, Ireland is much better placed to compete internationally as a headquarters and holding company location.