Ireland's IFSC (International Financial Services Centre)

The IFSC is today a generic term used to refer to Ireland's internationally trading financial services industry, employing approximately 25,000 people directly (24,761 at end December 2010, according to the annual Finance Dublin Employment Survey 2011), located throughout the Republic of Ireland, but predominantly in the Dublin region. It comprises some 450 internationally and Irish owned cross border financial services businesses, operating in over 1,000 corporate entities. In addition, indirect IFSC employment stands at over 6,000 in professional services, and markets infrastructure (service provider) companies.

The Samuel Beckett Bridge on the River Liffey, Dublin, location of many of the companies in Ireland's IFSC.

IFSC employment remained stable throughout the global financial crisis beginning in 2007, and in 2010 returned to growth, recording an overall rise in numbers employed between December 2009 and 2010, according to the annual Finance Dublin Employment Survey, published in March 2011). The survey showed growth in investment funds, international insurance, aviation finance and in other specialist finance businesses.

Facts and Figures about Ireland's IFSC (Figures as of March 2011)

* More than 50% of the world's leading financial services firms have subsidiaries there

* Half of the world's fleet of leased aircraft

* The investment fund industry represented 11% of total shares/units in issue by euro area funds, (31 March 2011)

* The largest provider of cross border insurance in the EU with €‘16.4 billion in premiums in 2009

* €1.9 trillion in funds administered in its investment funds sector (December 2010)

Headlines from Finance Dublin and FINANCE DUBLIN Yearbooks

Cross border life premiums up by 8.7 p.c. in 2009

* Gross premium income in the Irish cross border life assurance sector increased by 8.7 per cent in 2009, from €16.04 billion in 2008, to €17.56 billion in 2009, the latest edition of the ‘Blue Book’ reveals. The ‘Blue Book’, or the Insurance Statistical Review 2009 as it is now known, was published by the Irish Financial Regulator on September 10th. (From Finance Dublin, October 2010).

Ireland's domiciled investment funds reach all time record NAV totals in 2010

Ireland’s funds industry broke new ground in 2010 and has fully recovered declines during the credit crisis in 2008/09. According to the Irish Central Bank, the total assets of Irish domiciled funds at end May 2010 reached €856 billion compared to the previous peak of €808 billion in 2007. (From Finance Dublin, July 2010). By end 2010, the total for funds domiciled in Ireland stood at €963 billion, while total funds NAVs stood at €1.9 trillion (including funds domiciled in other jurisdictions, but administered in Ireland).

This financial services growth has been mirrored in other FDI sectors, such as IT and pharmaceuticals, underpinning the continued high ranking of the Republic as one of the most FDI-friendly jurisdictions on the globe, underpinned by strong reiterations of the committment by the Government and major political parties to the importance of the unalterability of Ireland's headline corporation tax rate of 12.5%.

Finance Dublin and the IFSC

Finance Dublin was established in 1996, as a consequence of the growing IFSC content of Finance Magazine which was established in 1987, the same year as the IFSC was established by the Irish Government and the European Union.

The IFSC, as originally defined (i.e. companies established under Irish Department of Finance certification as 'IFSC' companies before 2000) contributed 16 per cent of the Republic of Ireland's corporation tax revenues in 2010, with the wider international financial services industry contributing over one fifth of Irish corporation tax revenues in 2010.

Although Finance Dublin has been variously described as the 'flagship' of the IFSC and indeed its 'bible', it is an independent commercial publication, published by Fintel Publications Ltd.

It has provided its readers with a forum of unique and insightful information, and viewpoints, on the businesses making up Ireland's international financial services industry, and has been to the fore in identifying trends and issues in both Irish and international finance in international media terms. For example, it identified the importance of securitisation at the outset of its establishment in 1987, and, from 2000 onwards in articles and Finance Dublin conferences published many articles on the instability of the credit derivatives markets, and its potential to 'blow up', with warnings, notably in 2005 and 2006, of the impending potential difficulties in credit derivative markets. On the domestic Irish economy, it was the first publication in Ireland to publish clearly argued analysis of the overheating of the Irish housing market, and its implications as early as 1995, and in keynote articles published in 2000, in 2007, and in intervening years.

A sense of the IFSC's history is provided by the following publications, selected from the archives of Finance Dublin, and which appear here as historical records of events as they unfolded at the time, unvarnished by re-writing, and the wisdom of hindsight. The following supplements were published in Finance Dublin in 2006, and in 2002.

The IFSC Story

The history of Ireland's International Financial Services Centre's begins in 1987, when it was founded, although its genesis dates back to the early 1970s.

The IFSC tax incentive zone was established with EU approval as an initiative of the Irish State in 1987. Although the process of approving IFSC companies came to an end in December 2000, IFSC companies which came into existence before that date benefited from the fiscal regime of the IFSC until the end of 2005. The IFSC regime came to an end as of December 31st, 2005, and all companies operating in the international financial services sector from 2006 onwards pay corporation tax at the prevailing rate of 12.5 per cent.

As well as the preferential corporation tax rate, IFSC companies have availed of Ireland’s network of double taxation agreements, as well as other incentives including:

• No withholding tax on interest paid to non-residents
• Tax exemption for collective investment/life assurance funds
• No net asset value tax on funds
• No municipal taxes
• Double rent allowances for certain IFSC tenants
• First year depreciation allowance on certain items of capital expenditure

It was a condition of the incentive that companies would locate in a the Custom House Docks site as soon as practicable.

Companies which had IFSC certificates fell into two categories (1) those whose tax certificates ceased to have effect after 31 December 2002 and (2) those whose tax certificates ceased to have effect after 31 December 2005. Once the IFSC tax certificate ceases to have effect, the company is no longer entitled to claim accelerated tax depreciation allowances. The double rent allowance incentive for operations located in the IFSC will end on 31 December 2008, but the availability of the allowance during that time is dependent on the date on which the construction or refurbishment of the building was completed. Expatriate staff relocated to Ireland were formerly taxed only on remuneration or remittances they bring into Ireland, and not on world-wide income. However, this changed in the 2006 Budget, when the remittance basis of taxation was abolished.

Transition

All new cross-border financial services enterprises establishing in Ireland since January 1st, 2003 are subject to a corporation tax rate of 12.5 per cent on trading income. While this new tax rate is higher than the IFSC 10 per cent rate, the new regime is simpler, has the approval of the EU, the guarantee of the Irish Government (which, like all EU Governments, has the right of veto on tax matters) and no geographic restrictions on location within Ireland.

This fiscal independence (i.e. confirmation of the veto concerning the rights of individual EU nations to self regulation in national tax matters) was upheld at the European Council in Nice in December 2000.

As the 12.5 per cent regime is neither limited with regard to the activity of corporations or to their geographic location. It is neither a ‘state aids’ nor does it fall under the rubric of ‘harmful tax competition’.

The Irish Government as a matter of tax law and policy continues to oppose any measures to introduce tax harmonisation within the EU.

The original IFSC incentive system involved a 10 per cent rate of corporation tax until 2005, but coinciding with the agreement on the new 12.5 per cent regime, the Irish Government introduced in 1998 a phasing-out period for the old regime.

The corporation tax rate applying to non-IFSC companies was stepped down to 12.5 per cent in the intervening years as follows: The Finance Act 1999 also provided that any ‘non-trading income’ of a company would be taxed at a rate of 25 per cent. Another significant development to enable the IFSC to go nationwide is the extension of the IFSC gross roll-up tax treatment for life assurance and funds to the rest of the Irish economy. This change has been provided for in Finance Act 2000 and enables fully tax transparent international life and funds business to be offered by both IFSC and non-IFSC companies. Further enabling legislation in the area was included in the Finance Act 2001.

Most IFSC companies benefited from the 10 per cent rate until the start of 2006, and are now taxed at the prevailing tax rate of 12.5 per cent. Those IFSC companies that were approved after July 1998 were given a 10 per cent tax certificate up to the end of 2002. With effect from 1 January 2003, these companies are subject to tax at the standard rate of 12.5 per cent.

Additional entities

New agency managed companies or ‘additional entities’ e.g. captive finance, insurance companies, and securitisation vehicles, are taxed at a rate of 12.5 per cent and as of 2003 are no longer approved by the Minister for Finance.

The incentives in detail

Irish tax resident funds enjoy exemption from tax on dividend and interest income and capital gains. This tax-exempt status is encompassed in Ireland’s domestic legislation and includes not only funds whose operations are carried out in the IFSC but also funds whose operations are carried out anywhere in Ireland. The Finance Bill 2004 exempts investment funds from VAT, in the post-IFSC era.

IFSC life assurance companies can obtain gross roll-up (effective exemption from Irish tax) on investment returns accruing to non- resident policyholders. From 1 January 2001, non-IFSC life assurers operating in Ireland are also taxed in this way so that there is no annual tax imposed on policyholders’ funds.

Other incentives for companies that have an IFSC certificate include the ability to offset certain capital allowances on commercial leasing activities against other IFSC sources of income and a 100 per cent write-off of new equipment purchased by the IFSC company. There are detailed rules for the computation of trading profits and, by and large, relief is available for expenditure of a non-capital nature, which is wholly and exclusively incurred for the purposes of the trade.

Irish law

Ireland is a common law jurisdiction as modified by legislation and by the written constitution of 1937. Justice is administered in public courts, with judges appointed by the President on the advice of the Government.

The Judiciary and the legal system is constitutionally independent of Government. The Courts system is divided into the District Court (the court of summary jurisdiction), the Circuit Court, the High Court and the court of final appeal, the Supreme Court. Cases - if they are considered to involve aspects of EU Law - may also be referred to the European Court of Justice while decisions of the European Court may also have implications for the domestic law.

The legal profession is divided into solicitors and barristers. In the higher courts, cases are normally conducted by barristers, and usually advised by solicitors.

Regulation of financial services entities in Ireland is subject to the general regulation of the relevant financial sectors by the Irish Financial Regulator. In turn, Irish regulatory regimes are subject to overall EU legislation and Directives as part of the Single Market in financial services.

EU law

European Union law is an independent system of law, which applies equally and uniformly in all member states of the Union, of which Ireland is a full member. EU law is distinct from national law and it takes precedence over national law in those spheres in which it applies (for example the free movement of capital, and the operation of the Single Market, the areas in which competency has been extended by Member States to the Union).

The system of EU law comprises two elements - primary law, which is contained in the Treaties of the Union (in effect the ‘constitution’ of the EU), and secondary law, which is to say the day-to-day law making of the Union (Regulations and Directives) as promulgated by its institutions. The European Court of Justice decides points of law and interpretation. Failure by a member state to properly implement EU law (for example an aspect of the Treaties, a Directive or a Regulation) may result in the Commission taking a case against it in the Court. The Court also has jurisdiction over disputes involving or concerning the institutions of the Union, undertakings and private individuals.