Despite recent changes brought into the international tax arena by the OECD’s BEPS project, as well as EU level tax changes, Ireland’s standing as a location for holding company remains strong write Deloitte’s Eugene O’Keeffe and Robert Farrington. They outline the key attributes of Ireland’s regime and analyse the implications if Ireland moves to a territorial system of taxation.
Ireland has earned its reputation as a world-class location to establish a holding company and such reputation has endured the introduction of many recent tax changes at the OECD and EU level. Ireland’s taxation regime contains the following key features which have enhanced Ireland’s position as a leading holding company location.
Relief for foreign tax suffered on dividends received
Dividends received by one Irish resident company from another Irish resident company are generally exempt from corporate tax.
While dividends received by Irish holding companies from foreign subsidiaries are not exempt from tax, there are various reliefs which have the potential to reduce the Irish tax payable in respect of such dividends to nil. Such provisions include a 12.5% tax rate on dividends received out of the trading profits of companies that are resident for the purposes of tax in EU member states, or in countries with which Ireland has entered into a double tax agreement (DTA).
Generally, any other dividends receivable would be subject to Irish tax at 25%.
However, a foreign tax credit may be available for any withholding taxes suffered and for any underlying tax imposed on the profits out of which the dividend has been paid. This can usually result in no additional tax being payable in Ireland upon receipt of the foreign dividend where the foreign effective tax rate imposed on the underlying profits is higher than the Irish rate.
In addition, Irish holding companies can avail of pooling provisions which means in situations where the foreign tax on certain dividends exceeds the Irish tax payable, the excess credit can be “pooled” and offset against Irish tax arising on other foreign dividends, where the foreign tax is less than the Irish tax. This means where the blended effective tax rate imposed on foreign dividends is greater than the Irish rate, then no additional Irish tax would be payable and any excess foreign tax credit can be carried forward and utilised in future years.
This allows for a tax efficient way to repatriate profits to the Irish holding company.
Participation exemption on capital gains
A participation exemption from capital gains tax on the disposal of shares in certain subsidiary companies exists which creates the potential to save significant tax where the necessary conditions are met. The two main conditions which must be met for the relief to apply are that the holding company must own, or be beneficially entitled, to at least 5% of the shares in the foreign trading subsidiary being disposed of, and the foreign trading subsidiary must be resident for tax purposes in an EU country or a country with which Ireland has entered into a DTA.
This particular relief applies automatically where the necessary conditions are satisfied, and the holding company will not be liable to tax on gains (nor will it get relief for losses) on disposal of any shares in the EU/DTA resident investee.
Administration of Double Tax Relief and the consideration of a move to a Territorial Regime of Taxation
Currently, the above-mentioned participation exemption from certain capital gains does not apply to foreign branch profits or dividends received from foreign subsidiaries. Instead, generous double taxation relief provisions are in place which have the potential to reduce any tax payable on such profits and dividends to nil. While quite favourable in its ultimate treatment of foreign branch profits and dividends, Ireland’s double tax regime could be considered quite complex and requires careful consideration as to the quantum of relief available. With this in mind, the “Update to Ireland’s Corporation Tax Roadmap”, published in January 2021 by Ireland’s Department of Finance, laid out various commitments to improve Ireland’s corporation tax rules. Included within same was a commitment to consider the move to a territorial regime of taxation.
In its strictest sense, a fully territorial regime would have the effect of focusing solely on the taxation of income and gains earned in Ireland and exempt any foreign-source profits of Irish resident entities. However, should such a system of taxation be adopted, it appears the Department of Finance may be leaning towards one of the same nature of those seen in other EU States, which grants a limited territoriality by way of an exemption from tax for foreign branch profits and dividends from foreign subsidiaries. This would be similar in nature to the current participation exemption from certain capital gains discussed above.
It is expected the Department of Finance will conclude on this Public Consultation in the short to medium term once the dust has settled around the introduction of the global minimum 15% tax rate, as captained by the Organisation for Economic Cooperation and Development (OECD).
Deloitte, in its response to the Department of Finance’s public consultation, has advocated for a territorial system which taxpayers can elect into, rather than applying automatically. This would allow taxpayers flexibility in managing their tax affairs, as some taxpayers may not ultimately benefit from an extended territorial regime once the impact of recent tax changes such as the Interest Limitation Rules (ILR), which are discussed below, have been considered.
The result of such proposed changes would lead to a more streamlined tax compliance process for Irish holding companies and greater certainty around the tax treatment of certain arrangements.
Where interest is incurred by an Irish holding company on funds borrowed to acquire shares in a trading subsidiary or loan on to such a trading subsidiary and certain other criteria are satisfied, relief may be granted for any such interest, which has been actually paid, as a charge against the holding company’s total profits. Such relief may be claimed within the Irish holding company and it can be surrendered down the chain to any Irish resident trading companies.
Certain restrictions to the relief may apply where the loan in question has been advanced from a company connected to the holding company. You also must consider the impact of the new ILR provisions (discussed below) and the arm’s length principles set out by the OECD Transfer Pricing Guidelines in respect to financial transactions.
Interest Limitation Rules
On 20 June 2016, the Council of the European Union adopted the EU Anti-Tax Avoidance Directive (the ATAD), which included ILR measures. Ireland, alongside its EU counterparts, has transposed ILR legislation which applies for accounting periods commencing on or after 1 January 2022. Such provisions limit the ability of entities to deduct net borrowing costs in a given year to a maximum of 30% of earnings before interest, tax, depreciation and amortisation.
There are various exemptions from the ILR which would need to be considered on a case-by-case basis. For example, the ILR does not apply where the exceeding borrowing costs of an entity are below the threshold of €3m.
Amongst many other factors such as reliable infrastructure, educated workforce and use of the English language, the above tax factors clearly distinguish Ireland as a competitive holding company jurisdiction for investors.
Eugene O’Keeffe is Tax Director and Robert Farrington is Tax Associate at Deloitte.