In 2004 the Irish Government introduced a participation exemption regime in respect of the disposal of subsidiaries. Since then Irish tax law applicable to holding companies of a trading group has been expanded and developed to make Ireland a very attractive location for establishing holding companies.

In choosing a jurisdiction to locate a holding company essential requirements include:

  • no additional tax on dividend income;
  • no capital gains tax on disposal of subsidiaries;
  • no outward bound withholding taxes on dividends or interest;
  • an interest deduction for borrowings used to finance acquisitions;
  • no anti-abuse legislation such as controlled foreign corporation (CFC), transfer pricing or thin capitalisation; and
  • availability of a good treaty network with all major OECD and EU countries.

As a result of legislative change Ireland now fulfils all these essential requirements.

Ireland is a member state of the EU, it is the only English speaking jurisdiction in the Euro zone and is a full onshore tax jurisdiction. The recent trend of large UK companies (including a FTSE 100 company) establishing their corporate headquarters in Ireland reflects the attractiveness of the regime and it has created considerable interest internationally.

Ireland can be used as the ultimate holding company location. Alternatively it can be used as an intermediate holding company location, particularly where there may be future capital appreciation in a subsidiary and a capital gains tax exemption is unavailable in the current location.

A summary of the Irish holding company regime is set out below.

Taxation of dividend income - Foreign Tax Credits

Ireland operates a comprehensive system of tax credits for foreign withholding and underlying taxes incurred by overseas subsidiaries of Irish companies. An Irish holding company may not pay any additional Irish tax on foreign dividends by utilising a combination of different credit methods and onshore dividend pooling.

Credit relief for foreign taxes is available in three ways:

  1. EU Parent-Subsidiary Directive: Under this Directive credit relief is available in respect of underlying taxes incurred on dividends received from a minimum of a 5% participation in companies in other EU Member States and Switzerland (25% shareholding required).
  2. Double taxation treaties (DTA): Under the terms of Ireland's double tax treaties, credit relief is generally available in respect of underlying tax paid in subsidiary companies resident in the other tax treaty jurisdictions. Currently 45 tax treaties are in place between Ireland and other treaty jurisdictions.
  3. Unilateral tax credit relief: Ireland operates a system of unilateral tax credits in respect of a minimum 5% shareholding in foreign subsidiaries held by an Irish resident company. Under these provisions credit is available for underlying tax paid by a foreign subsidiary. Second and third tier credit is also available provided the 5% shareholding requirement is satisfied through direct or indirect 51% shareholdings. Unilateral credit relief can allow credit for a wide variety of taxes including federal, regional and municipal. In many instances the unilateral method has a wider definition of taxes than many treaties and provides greater tax credits.

A system of onshore pooling operates in Ireland whereby foreign dividends can be blended to equal the 12.5% or 25% tax rate in Ireland. Unused tax credits can be carried forward indefinitely for use against future dividends.

The Irish Finance Act 2008 enhanced the relief available under the unilateral tax credit method. Subject to certain conditions and by election, the 25% rate of corporation tax will no longer apply to dividends received by an Irish company where those dividends are paid out of trading profits. The dividends will be subject to the 12.5% rate of corporation tax with credit for foreign taxes incurred.

Where dividends are paid out of mixed income, credit relief is available at a rate of 12.5% in respect of the portion that relates to the trading profits. Credit relief is available at 25% in respect of the portion that relates to income paid out of non trading profits.

Capital Gains Tax (CGT) exemption on disposal of subsidiaries.

Ireland has a comprehensive exemption from CGT on the disposal of trading subsidiaries. The conditions for the exemption are:

  • the Irish company must have continuously held at least 5% of the share capital of the company being disposed for at least 12 of the last 24 months;
  • the company being disposed must have been a trading company and be resident in EU or a tax treaty jurisdiction. This would include subsidiaries resident in Ireland;
  • if the company being disposed was not a trading company then the exemption may be available where the company being disposed was a member of a trading group. A trading group is defined as one where more than 50% of the group's business consists of trading activities.

While there are some exclusions to this CGT exemption in practice these do not have much application in an international context. One significant advantage of this holding company exemption over other countries is that the trading company being disposed does not need to be a member of a trading group. The converse may apply in that the company being disposed need not be a trading company where it is a member of a trading group. This gives Ireland a significant competitive advantage over other EU Member States where the exemption is not always available for non trading companies.

Outward bound withholding taxes

While Ireland does have dividend withholding tax (DWT) in practice exemptions are available when dividends are paid to:

  • corporate or individual shareholders resident in an EU or DTA jurisdiction provided, in the case of a company, that it is not more than 50% controlled by Irish tax resident individuals;
  • companies quoted on a recognised stock exchange in an EU/DTA country;
  • companies controlled by EU or DTA residents. This could include for example a company resident in a tax haven jurisdiction that is ultimately controlled by EU or DTA residents;
  • EU/DTA pension and superannuation funds.

The exemptions available under domestic law are available where certification has been provided by the company's auditor and/or the foreign tax authorities. No advance clearance from the Irish tax authorities is necessary and a minimum of administration is required.

In addition payments of interest to companies resident in EU/DTA jurisdictions are exempt from withholding tax under domestic law. In common with the DWT exemption there is a minimum amount of administration required and no advance clearance is necessary. Exemptions under the EU Interest and Royalties Directive and tax treaties are also available.

Financing of Acquisitions

In general an interest deduction on borrowings is available to acquire shareholdings in companies where the Irish company acquires a minimum of a 5% equity stake in the target. An interest deduction is also available where an Irish holding company lends money to a 5% subsidiary and the funds are used for a trading purpose. While there are anti avoidance rules to counter artificial group financing structures these do not apply in the event of third party lending (e.g., a bank) or where an external acquisition is made.

CFC and Transfer Pricing

In general Ireland does not have CFC legislation. Accordingly, an Irish holding company is not subjected to tax on its earnings from foreign subsidiaries unless these are paid as dividend back to the Irish holding company. In this event as outlined above credit relief is most likely to reduce any additional Irish tax to nil.

Ireland does not have formal transfer pricing legislation. Accordingly, there are no requirements to price or seek to price trading activities between companies or groups of companies at an arms length basis. In multinational groups it is normally foreign transfer pricing issues that seek to limit the amount of group profit made in Ireland.

While limited transfer pricing rules do apply in certain tax incentive areas these do not have general application. This has obvious advantages in terms of lack of bureaucracy and no need for detailed transfer pricing reports. Furthermore Ireland does not have detailed thin capitalisation rules and there is no specific debt: equity ratio required of Irish resident companies.

In respect of intra-group asset transfers CGT legislation requires that an arms length price is used for connected disposals. This provision can be used to structure a tax free step up in cost in group transactions. In addition, transfer tax exemptions are valuable for intra- group transfers.

Treaty network

Ireland currently has 45 treaties (July 2008) with most OECD and EU countries. Another 10 treaties are under negotiation and more are planned. The Irish treaties follow the OECD model and, in general, only seek to tax Irish source income.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.