No ‘group support regime’ in Solvency II sees firms invert operations in Ireland
A number of major international insurance firms, e.g. Aviva, Zurich,Willis, have redomiciled their headquarters in Ireland following international developments, including changes to the UK CFC rules and the absense of a group support regime in Solvency II. By choosing Ireland, these companies can still access EU markets using passporting provisions while being based in one location which reduces their capital requirement. SANDRA DAWSON looks at why Ireland is well placed to see more insurers relocate in Ireland
The last 18 months has seen a number of insurance and reinsurance companies taking a decision to restructure their operations and in many cases the final structure has involved Ireland. The decisions range from redomicilation to establishing reinsurance operations and/or headquarter operations in Ireland with branches around Europe. Among the high profile insurers/insurance related service providers who have taken such decisions are Aviva, Beazley, RSA, Willis, XL and Zurich, to name a few. The migration of the Willis Group to Ireland created the largest, by market capitalisation, financial services group headquartered in Ireland.
Sandra Dawson
Sandra Dawson

So why are these global players deciding to restructure and why are so many choosing Ireland?

The decision to redomicile is largely driven by one or more of the following;
• Uncertainty surrounding UK Controlled Foreign Companies (CFC) rules
• Increased international focus on offshore financial centres and the associated reputational risk
• US crackdown on perceived abuses associated with offshore financial centres and the G20 action against tax havens
• Solvency II capital and operational efficiencies.

UK CFC rules
In the 2008 Pre-Budget Report, the UK Government announced reform of the UK CFC rules. The Government’s aim was to introduce a reformed CFC system to protect against diversion of UK profit and not tax profits genuinely arising overseas; but nobody knew what form the new rules would take. It was anticipated that the new rules would not be known before 2011. This introduced uncertainty into the UK tax system which is very damaging for companies and makes it difficult for them to appraise the tax impact of investment decisions and to forecast what their effective tax rates and tax capacity might be going forward. As a result, many UK headed groups chose to relocate elsewhere, rather than wait to see what future reform might bring. However, the UK government has recently announced that it will introduce interim improvements to the current CFC rules in Spring 2011 ahead of full reform in Spring 2012. This may stem the flow of companies redomiciling from the UK to Ireland purely for CFC reasons only.

Offshore financial centres
At the G20 London summit on 2 April 2009, the G20 countries announced their intention to take action against non-cooperative jurisdictions, including tax havens, to deploy sanctions to protect their public finances and financial systems. These actions are part of a package of measures to strengthen the global financial system.

This G20 statement coincided with an announcement by the Organisation for Economic Co-operation and Development (OECD) of a progress report in relation to the implementation of an internationally agreed tax standard. Countries which did not commit to the standard were placed on a ‘black list’. The Cayman Islands, Bermuda, the Bahamas and the British Virgin Islands were among those placed on the ‘grey list’ as having met a number, but not all, of the requirements laid down by the OECD (note all subsequently moved to the ‘white list’).

The XL Capital Securities and Exchange Commission (SEC) filings in advance of their redomestication to Ireland included the following statement as part of the reasons for the transaction: ‘We are subject to reputational, political, tax and other risks because of negative publicity regarding companies that are incorporated in jurisdictions, including the Cayman Islands, whose economies have low rates of, or no, direct taxation or which do not have a substantial network of double taxation (or similar) treaties with the United States, the European Union or other members of the Organisation for Economic Co-operation and Development (the ‘OECD’). Our Board believes that changing our place of incorporation will reduce those risks and offer the opportunity to reinforce our reputation, which is one of our key assets, and to better support our legal and business platforms’.

Capital & regulatory efficiency
The Solvency II framework directive was voted into European law in April 2009. The final directive significantly streamlines regulation and affects capital requirements for insurance groups.

In offering opportunities for capital efficiency through risk diversification, Solvency II originally proposed a ‘group support regime’ that would enable local entities to rely on support from their parent group to cover part of their capital requirements. This was a major point of contention among European Union (EU) member states and has been excluded in the directive, posing different challenges for insurance groups.

Given the removal of group support from the Solvency II directive, groups have taken the decision to review their legal structures. The lack of a ‘group support scheme’ under Solvency II means that incorporation in each jurisdiction in which an insurer operates may not be feasible going forward. It may therefore be advantageous for companies to operate their European business from one location.

The EU single insurance market affords insurance groups the flexibility of choosing one central location and regulator. Companies can choose one EU location in which to incorporate and can make use of passporting provisions to access other EU insurance markets. By choosing one headquarter location with branches around Europe, companies have the potential to significantly reduce their capital requirement by enhancing the benefit of diversification. Tax efficiency may also be improved by upstreaming cash, repatriating capital, eliminating dividend traps and releasing value in contingent assets. Insurance groups should be able to streamline regulatory reporting and lower compliance costs by reducing the number of regulatory regimes under which they operate and the number of legal entities which are subject to supervision. There are also potential Vat benefits from such a structure.

The transfer of Zurich’s European business to Ireland is an example of a company making best use of its capital. Markus Hongler, Chief Executive Officer, Zurich Insurance plc (ZIP), said: ‘Upon completion of all transfers, ZIP is expected to generate revenues of about EUR 11 billion. For Zurich as a Swiss-based corporation, a single EU-based risk carrier with branches in the EU member states is both capital and operationally efficient. It enables us to take advantage of the EU single market and regulatory environment.’

Why Ireland?
When companies take the decision in principle to restructure, there are a number of reasons why they choose Ireland as the preferred location.

The Irish insurance market
The insurance industry in Ireland dates back over 150 years and is well established with more than 15,000 employees. Following the establishment of the International Financial Services Centre (IFSC) back in 1987, Ireland became an internationally recognised and reputable financial services and insurance location with significant global expertise. Indeed the success of the IFSC is largely responsible for Dublin’s position as the 5th most attractive European city for inward investment in 2009 (source 8th annual Ernst & Young European Attractiveness Survey). Since the advent of the IFSC, the level of expertise has increased significantly such that Ireland is recognised as having a highly skilled financial services workforce, particularly in the area of insurance.

In addition, following the financial crisis, the cost of this expertise and indeed the cost of doing business in Ireland has reduced significantly as confirmed in a recent Ernst & Young quarterly Eurozone Economic Forecast. However reducing costs is not always a primary driver as confirmed by Markus Hongler in a recent press interview. Commenting on the drivers behind ZIP’s move to Dublin, Hongler said that ‘wages were not an issue and the question has been about getting the best people, not the cheapest people’.

The Irish Government is committed to continuing to develop the Irish financial services market and attract overseas investment. This is evidenced by the recent appointment of John Bruton (former Prime Minister) as Financial Services Commissioner for Ireland whose role will be to promote Ireland as a premier financial services location to foreign investors overseas.

Favourable tax regime
The key feature of Ireland’s tax regime is its low corporation tax rate of 12.5 per cent, one of the lowest in the OECD. This rate of corporation tax gives Ireland a significant competitive advantage over other European countries and has been committed to for the long term by both the Irish government and the
opposition parties.

Other attractive features of Ireland’s tax regime include:
• Ireland is not regarded as a tax haven by the Obama administration
• Exemption from Irish tax for foreign (EU Member State or country with which we have a double tax treaty) portfolio dividends (<5% shareholding including voting rights) received by an Irish company where they are regarded as part of the trading income of
the company
• Attractive holding company regime
• Flexible measures to relieve
double taxation
• No withholding tax on interest or dividend payments to companies resident in an EU Member State or country with which Ireland has a double tax treaty, provided in the case of interest it is subject to tax generally in the foreign country
• Extensive and expanding treaty network
• Limited scope transfer pricing rules
• No general thin capitalisation rules
• No CFC rules
• No capital duty
• No stamp duty or insurance premium tax where risk is located outside Ireland

Regulation
Prior to the financial crisis, Ireland was widely recognised as having a pro-business flexible regulatory regime. Following the fallout from the financial crisis, there is no doubt that the regulatory regime in Ireland has become more stringent. Gone are the days of principles based light-touch regulation. Our new regulator, Matthew Elderfield, has signalled that he intends to implement international best practice in Ireland in the form of ‘assertive risk based regulation underpinned by a credible threat of enforcement’. While this may lead to additional burdens on insurance companies, the objective is to create a best in class regulatory framework. This can only be good for the industry and should help enhance Ireland’s reputation internationally as a well regulated jurisdiction.

The Regulator has undertaken to dedicate sufficiently skilled resources to the authorisation process. This should assist the efficiency with which new applications and redomiciliations are processed.

Ireland has a first class business, tax and regulatory environment together with a highly skilled workforce with significant insurance expertise. It is also english speaking, a member of the EU and has the euro as its currency. While Ireland has its financial problems, in the Hongler’s ‘What is very positively recognised is how fast Ireland’s government has taken decisions, that they didn’t only speak about it… they have done a lot, whereas you have other countries still debating what to do’. As the implementation date for Solvency II moves closer and the global agenda against offshore financial centres and tax havens gathers pace, Ireland is very well placed to compete for and win the ensuing inward investment - in particular inversions and headquarter operations.
Sandra Dawson is a tax director in the financial services group of Ernst & Young.
This article appeared in the September 2010 edition.