|
|
Thursday, 25th April 2024 |
| Ireland seeking Oscar for ‘best holding company location’ |
Back |
| With Ireland’s newly introduced holding company tax regime beginning to generate interest amongst multinationals, Evelyn Forde compares the other ‘nominees’ in this category, Luxembourg and the Netherlands, and assesses Ireland’s chance of ‘winning’ business away from these jurisdictions. |
IIn the film world, campaigns to get an Oscar nod are hard fought. As with any race where the prize is substantial, extensive resources, creativity and hardball tactics have been used by Hollywood movie bosses in their attempt to make the coveted nominee list with a view to (at least) reaping the box office rewards during the Oscar campaign season. In particular, Miramax’s co-chairman, Harvey Weinstein, has been credited with raising the bar on Oscar race tactics and has the nominations and awards to prove it.
In the world of international tax, the coveted award that countries are vying for is that of ‘best holding company location’. In particular, EU member states have shown ‘Weinstein like’ commitment in their campaign to influence multinational corporations (MNCs) deciding on a headquarters location. In the past, the Miramax of the tax world has been The Netherlands or Luxembourg who have, consequently, dominated the holding company location race. However, spurred on by their success and also the expectation of an increased use of European holding companies (following the coming into force in October 2004 of regulations establishing a pan-European company), the last five years has witnessed numerous amendments to the tax laws of many other EU countries. Ireland’s proposed substantial shareholding exemption and amendments to the taxation of foreign dividends announced in Finance Bill 2004 are the latest attempt by an EU contender to make it onto MNC’s coveted nominee list.
Before considering these proposed changes to the Irish tax regime, let us first reflect on what tax factors influence MNCs in their choice of a headquarters location. In contrast to the Oscar race where the recipe for success is unpredictable (although cynics among us would argue that films starring individuals with unusual afflictions seem to have the edge), the tax formula for a winning headquarters regime is capable of more objective definition.
Generally speaking, four things are desired from a holding company.
- First, an ability to get dividends out of its subsidiaries free of withholding tax or at a lower rate of withholding tax by virtue of a tax treaty or the EU Parent/Subsidiary directive.
- Second, an exemption from tax in the holding company jurisdiction for dividends and capital gains.
- Third, an ability to take dividends out of the holding company without giving rise to any charge to tax in that jurisdiction.
- And finally, a tax deduction for borrowings to acquire shareholdings is an added attraction.
Therefore, in general, MNCs devising/rethinking their organisation structure frequently begin their tax considerations by short-listing those countries with some/all of these characteristics. The composition of the final nominee list (which is then subjected to more detailed analysis) is dependant on particular group needs where the main objective of the MNC is no withholding tax on dividends received/paid, Ireland would usually feature strongly due to the domestic tax exemptions for dividends paid to EU/DTA countries, a strong treaty network and EU membership. Further, where maximum deductibility of interest is a priority, Ireland offers favourable conditions.
However, Ireland’s absence from the MNC’s nominee list was almost guaranteed where the emphasis was on tax-free treatment of capital gains or no further local tax on dividends. In the case of the former, Ireland’s pre-Finance Bill 2004 20 per cent capital gains tax on disposal of shares was simply not competitive when faced with competition from our EU neighbours that, subject to conditions, exempt the gain. In the case of the latter, countries which simply exempted foreign dividends from local tax or achieved a similar result by allowing generous credit for foreign tax suffered against local tax were more attractive options.
However, Finance Bill 2004 proposals for a substantial shareholding exemption and more generous double tax relief on foreign dividends received will, it is hoped, provide Ireland with a more complete holding company location package.
In essence, the substantial shareholding exemption is a relief from capital gains tax for disposals by a company of certain shares, put/call options over certain shares and instruments exchangeable into shares. As currently drafted (and significant changes are not expected), the relief will apply to the sale of a ‘substantial shareholding’ of shares in ‘qualifying companies’. This substantial shareholding must be held for a period of at least 12 months ending in the previous 24 months.
Generally speaking, a shareholding is substantial if the selling company has at least a 10 per cent interest in the company being disposed of and the selling company’s shareholding had a value of E15m. However, five per cent shareholdings will also be regarded as substantial if the selling company’s shareholding had a value of E50m.
Qualifying companies are essentially companies that:
- Do not derive their value from Irish land/buildings,
- Are resident in an EU (including Ireland) or DTA country (approximately 70 countries in all, taking into account an expanding Europe and Ireland’s growing double tax treaty network), and
- Are trading companies or are being disposed of by a trading group.
As regards the taxation of foreign dividends, Finance Bill 2004 proposes a form of onshore pooling for dividends received from all countries (and not just EU/DTA resident companies). This allows for excess foreign tax suffered on dividends liable to high foreign tax to be offset against Irish tax on dividends liable to a lower foreign tax. Creditable foreign taxes include tax at federal, state and municipal level that is levied, not only on the dividends (i.e. withholding tax), but also on the profits out of which they were paid (subject to the satisfaction of a 5 per cent shareholding test). In addition, unrelieved foreign taxes can be carried forward indefinitely. In summary, this more generous double tax relief should ensure, with appropriate planning, that no Irish tax will arise on foreign dividends in most instances.
These amendments are very welcome developments to the Irish corporate tax regime which boasts a number of other tax advantages including no ‘controlled foreign corporation’ rules (i.e. these are anti-deferral rules that levy a tax at holding company level on the profits of its subsidiaries even before they are accrued/received by the holding company), no formal thin capitalisation legislation (i.e. legislation which denies a deduction for interest to the extent that the company is financed excessively by debt) and limited transfer pricing rules. Combined with a 12.5 per cent tax rate on trading profits, Ireland now offers MNCs a more complete tax solution a favourable headquarters location together with a 12.5 per cent tax rate on the trading profits arising from other activities which holding company locations invariably attract, for example financing, research and development, administration or manufacturing.
Finance Act 2004 will be remembered as the legislation which facilitated Ireland’s presence on MNC’s ‘nominee’s for best headquarters location’ list its ultimate selection will depend on individual group needs and also a willingness to consider new alternatives to the old Dutch and Lux reliables. The 2004 Oscar race may have ended a couple of weeks ago, but the campaign to sell Ireland’s new holding company regime in the MNC market is just getting started. |
Evelyn Forde is a tax manager with Deloitte.
|
| Article appeared in the March 2004 issue.
|
|
|
