Ireland is one of the most popular jurisdictions for international corporations seeking to expand into the European market. Over 1,500 foreign companies (including Google, Apple, Microsoft, Facebook, Boston Scientific, Johnson & Johnson, GlaxoSmithKlein, and E-bay) have established significant operations in Ireland.
In addition to the larger multinationals outlined above, we have recently seen a large influx of small and medium sized firms (particularly U.S. based) who have decided to utilise Ireland as their European headquarters. These companies are involved in a wide range of activities in sectors such as financial services, pharmaceuticals, IT, software development, manufacturing and life sciences. As a member of the European Union (EU), Ireland is part of the world's second largest economy where goods, people and capital can move freely. Ireland is one of 19 EU member states using the euro as the official currency.
This article briefly summaries some of the main reasons why Ireland is viewed as an attractive location for companies looking for a base from which to expand into the European market and outlines some of the main issues which arise for foreign investors when considering incorporating an Irish company.
Tax Benefits Of Investing In And Through Ireland
One of the main reasons for Ireland's attractiveness as an investment location is the range of tax incentives which are available. It is obviously advisable for the prospective investor to carry out a detailed tax review at the outset (before any value is added to the Irish structure) to ensure that the Irish company fits into any existing structure in the most efficient way possible. It can often be expensive and time consuming to modify the structure after the Irish company has been incorporated and commenced trading and we would always recommend that our clients take Irish tax advice prior to commencing to trade. We have experience dealing with most of the tax structures favoured by multi-nationals which are considering investing in Ireland and have associations with most of the larger tax houses as well as some smaller firms which can be more economical. Each structure is different and each client will have different requirements however, the following is a list of some of the main advantages of incorporating an Irish company.
All companies incorporated in Ireland on or after the 1st January 2015 will be regarded as tax resident in Ireland unless it is considered a tax resident of another county under the terms of a double tax treaty agreement made with Ireland. Companies incorporated in Ireland prior to this date are treated as tax residents unless were they were ultimately controlled by a tax resident in another EU member state or in a country who has entered into a double-tax treaty with Ireland or the company or a related company is quoted on a stock exchange in an EU member state or a country with a double tax treaty with Ireland.
1. 12.5% Corporation Tax
Ireland's 12.5% corporate tax rate on trading income is obviously one of the main contributing factors for many companies deciding to establish operations in the Irish jurisdiction. In addition there are a variety of additional reliefs which (if applicable) can significantly reduce the effective rate of tax below 12.5% and in some cases can result in an effective rate of 0%. A tax rate of 25% applies to non-trading income such as investment income, foreign dividends, rental income, net profits from foreign trades, and income from certain land dealings and oil, gas and mineral exploitations.
2. Corporation Tax Start Up Exemption
A three year exemption from corporation tax is available for start-up companies (depending on the level of the company's corporation tax liability, employer's social insurance paid and the nature of the business carried out by the company). Any unused relief arising in the first 3 years of trading due to insufficiency of profits can be carried forward for use in subsequent years. This relief was due to expire by the end of 2014 however it has been extended to companies commencing a qualifying trade in 2015.
3. Substantial Shareholders' Exemption
Ireland has a 'substantial shareholders' exemption for gains tax arising on the disposal of shares in trading companies. There are certain conditions which must be met to claim this exemption. As such it is important that a Company's investments and the timing of various disposals are managed correctly to satisfy these conditions.
4. Ireland's R&D Regime
Ireland has one of the most generous R & D regimes in the world allowing a tax credit of 25% on qualifying R & D expenditure. The expenditure that is eligible for tax credit is €200,000. Relief is available on an incremental basis for amounts in excess of €200,000. The R&D tax credit is available in addition to the normal trading deduction for R&D expenditure incurred. Companies can pass the benefit of the R&D credit directly to employees in order for the employee to reduce their income tax liability for the year. To qualify for the R&D tax credit surrender regime an employee must spend 50% of their time solely on R&D.
5. Ireland's Intellectual Property Regime
Relief in the form of capital allowances against trading income is available for capital expenditure incurred by companies on a wide range of intellectual property and intangible assets acquired for use in a trade. The scheme applies to a broad range of intangibles (including assets acquired from group companies). There is no claw-back of allowances where an intangible asset is disposed of more than 5 years after the beginning of the accounting period in which the asset was first provided for the trade. The transfer of IP is exempt from Irish stamp duty.
6. Withholding Tax
Irish tax legislation provides for a 20% rate of withholding tax in respect of dividends, interest and patent royalties. However, due to the availability of a board range of exemptions, Irish resident companies can normally pay dividends, interest and patent royalties to non-residents free of any Irish withholding tax.
7. Double Taxation - Treaties and Agreements
Ireland is continuously expanding its tax treaty and agreement network so as to reduce barriers to cross-border trade and investment. Ireland has currently entered into double tax treaties with 72 countries. Irish Revenue Commissioner has concluded negotiations with Turkmenistan and a new agreement is expected to be signed shortly. Negotiations for new agreements with Azerbaijan, Jordan, Kazakhstan and Ghana are in progress and the Revenue Commissioner intends to initiate negotiations for new agreements with other countries during 2015. This will facilitate future expansion and modification of group structures.
8. Controlled Foreign Company Rules
Ireland has no Controlled Foreign Company Rules ("CFC"). This means profits of foreign subsidiaries are not taxed in Ireland until repatriated via dividend.
9. Thin Capitalisation Rules
Ireland has no thin capitalisation rules which allows Irish entities to be financed in whatever manner the group determines is most appropriate. Subject to certain conditions, a tax deduction is available for funding costs incurred by Irish companies investing in subsidiaries.
10. Transfer Pricing Rules
Ireland's transfer pricing legislation applies in respect of trading transactions only. The Irish rules impose an arm's length standard on trading transactions between related parties. Small and medium sized enterprises are excluded from the scope of Irish transfer pricing legislation. In addition, transactions entered into before July 2010 are "grandfathered" to exclude transfer pricing legislation applying to these transactions. Notwithstanding the above, due to the early stage at which Irish companies begin to export to other jurisdictions, companies need to plan ahead and implement a transfer policy in order that they can plan how they will be taxed in those locations. In doing so, an Irish company could avoid paying taxes in other jurisdictions at a stage when it is not necessary to do so.
11. Key Employee Incentives
Ireland has a Special Assignment Relief Programme which applies to employees assigned to work in Ireland. Subject to certain conditions, 30% of an employee's income in excess of €75,000 is exempt from Irish income tax and an employer can cover the cost of flights home and school fees on a tax free basis.
In 2012 Ireland introduced a Foreign Earnings Deduction scheme providing for a deduction from income tax for individuals who carry out the employment duties in BRICS countries. Other countries to which the scheme applies include Algeria, the Democratic Republic of the Congo, Egypt, Ghana, Kenya, Nigeria, Senegal and Tanzania, Bahrain, Chile, Indonesia, Japan, Kuwait, Malaysia, Mexico, Oman, Qatar, Saudi Arabia, Singapore, South Korea, Thailand, United Arab Emirates and Vietnam. To be eligible for such a scheme there are certain conditions to be met and the maximum deduction available is €35,000.
12. Grants and Incentives Available for Overseas Investors
The Irish Government is dedicated to foster long-term relationships with foreign direct investors. This is evident in the variety of grants and funding schemes available from Irish government entities for new companies seeking to incorporate in the Irish jurisdiction. The Industrial Development Agency (IDA) and Shannon Development are the primary grant-awarding bodies. There are many grants available to companies incorporating in Ireland including Capital Grants; Employment Grants; and Training Grants and Research and Development Capability (R&D) Grants.
The IDA provides advice and support to both new and existing companies. Furthermore the IDA owns properties and large sites in urban and rural areas throughout Ireland which it offers to start up companies and will guide the company in relation to where the best location is to fit its business objective. Industrial development agencies offer a range of attractive incentives for companies. These include grants towards start-up costs such as training and employment, and grants in respect of investment in research and development projects. Rent remissions and rent allowances may also be available.
Adrian Burke & Associates has been recommended by the Legal 500 as having a strong practice in foreign direct investment, for being "straight talking and honest" and for having a "genuine interest in the underlying transaction".
The above is a very general and simplified summary of the law on the subject matter. As such you should obtain professional advice before taking any actions as regards you or your company's affairs. Should you wish to make enquiries in relation to any of the areas touched on by this article please contact Adrian Burke & Associates.