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Thursday, 25th April 2024 |
| Finance Bill 2004 Update: Ireland's holding regime is good, but not as good as regimes in other EU countries |
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| The Finance Bill contained two major proposals designed to make Ireland’s tax offering to international groups attractive, and competitive with regimes elsewhere in the EU. One is the research and development relief discussed and the second is the holding company regime which allows groups to dispose of major holdings without a CGT liability, and to repatriate certain foreign earnings from such holdings in a tax efficient manner Seamus Hand writes. |
TThe participation regime
Ireland was one of the few countries in the EU that was not attractive as a holding company location by reason of a tax charge on gains arising from the disposal of major subsidiaries, including overseas subsidiaries. The result of this charge, was not to raise tax, but to ensure that no international group would structure its affairs so as to give rise to such a charge. Ireland’s proposed holding company regime has three elements.
• A capital gains tax exemption on the disposal of interest in major “subsidiaries”.
• Improved relief for foreign taxes when dividends are repatriated to Ireland from major overseas investments.
• Removal of surcharge on undistributed investment income represented by such dividends from major overseas investments.
How good is it?
Ireland’s proposed holding company regime is probably good enough to enable Ireland to be a viable location for a multinational wishing to set up a regional holding company. It is not as good as regimes in certain other EU countries, but it does represent a significant improvement.
The two principle weaknesses in the proposal compared to regimes elsewhere are firstly that Ireland will not fully exempt dividends from overseas investments, but only grants credit for foreign taxes related to the overseas dividend. Many foreign holding company regimes grant a total exemption, removing any risk of local taxation of the dividend (and generally without cost given that such taxes would rarely arise). The second weakness is that the capital gains tax exemption applies only to shares in companies that are resident in an EU or treaty country. This limits the range of affiliates for which an Irish holding company would be a suitable vehicle in the context of a multinational group.
Where a multinational already has, or is otherwise contemplating, a substantial investment in Ireland these disadvantages might not seem so significant. It is often more important to a multinational to be able to keep all of their regional activities in a single location, and the Irish regime may now be good enough in many instances to attract a regional headquarters and a regional holding company. Whether this happens in practice remains to be seen.
The new regime is subject to EU approval. So far the EU have shown a light hand in vetting holding company regimes elsewhere in the EU. However it would not be unexpected if sooner or later they begin to look more closely at these regimes in the context of state aids and in terms of tax competition. The Primorolo group, which examined harmful tax competition on behalf of the EU, excluded wholly company regimes from their review. Cynics might say that this was because Ireland did not have such a regime!
CGT Exemption
In order that an exemption from capital gains tax should arise on the disposal of shares by a company, it is necessary that numerous conditions be met including:
There must be a shareholding of at least 10% (backed by an entitlement to 10% of profits and assets) and the value of the shareholding held should be at least €15m.
Alternatively, the shareholding interest must be at least 5% where the value is at least €50m.
At the date of disposal, the investee must be a trading company or the investor company together with its subsidiaries must be primarily a trading group. The investee need not itself necessarily be a trading company.
The shares must have been held for at least one year and must not be trading stock.
Where these and some other detailed conditions are met, any gain on the disposal of the shares is exempt from tax.
Dividend Relief
The relief in relation to dividends does not provide the hoped for complete exemption from tax. Instead an enhanced tax credit (in the form of limited onshore pooling) will be granted against Irish tax on the dividends for any foreign tax relating to the dividends. Under existing law such a foreign tax credit is offsettable only against the Irish tax on each separate dividend received. The new rules amend that position to allow surplus credits on one dividend to be offset against Irish tax on another qualifying dividend, thus pooling all dividends and foreign tax credits for this purpose. The tax credit relief is also extended to certain territorial taxes (e.g. state taxes in Russia or the US) and also allows the carry forward of excess credits. The new relief does not currently apply to profit earned in and repatriated from a foreign branch.
Further relief is provided for a closely owned group in that dividends received on foreign shares which are eligible for the exemption from tax on capital gains are not taken into account for surcharge purposes on undistributed investment income.
Planning Ahead
One downside from the introduction of the new regime is that where shares are eligible for the exemption from tax on capital gains, it will equally follow that any loss arising on such shares will not be an allowable loss for offset against other chargeable gains. Thus existing Irish resident holding companies will need to review their portfolio to determine whether they are sitting on capital losses that should be crystallised and carried forward for possible future use.
Those companies which are at present contemplating a disposal of a subsidiary are faced with a difficult choice. Should they proceed with such a disposal and crystallise a chargeable gain which was liable for tax, or subject to commercial implications should they attempt to defer the disposal until the new regime is operational? The difficulty is that no-body can be sure EU approval for the new regime will be given and when after that date the Minister will activate the new regime. No doubt there will be one unfortunate person who is the last person to be taxed before the new regime is operational. |
Seamus Hand is a tax partner at KPMG.
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| Article appeared in the February 2004 issue.
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