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Finance Bill 2008 Back  
This year’s Finance Bill includes several useful measures to respond to industry needs but the more significant talking points regarding the treatment of foreign dividends and VAT on property are immersed in unnecessary complexity, write Brian Daly and Niall Campbell.
While several items on our October wish list fell through the holes in the Christmas stocking, in particular in relation to the banking and leasing sectors, the Finance Bill brings some worthy improvements for the insurance, securitisations and funds areas. Here, we will focus largely on details which were unavailable on Budget Day. This is based on the draft legislation at the time of writing.

Holding Company regime - Added Complexity?
Although not announced on Budget day, improvement to Ireland’s holding company regime, in the form of amendments to the taxation of dividends, were expected to ensure compliance with the principle set down in the ECJ Franked Investment Income (‘FII’) case.
Brian Daly

At best, the draft provisions may have done the bare minimum to deal with our discriminatory treatment of foreign versus domestic dividends, highlighted in the ECJ case. However the new system will do little to promote Ireland as a holding company location. Instead the legislation signals the birth of a complex system under which taxpayers will face an impractical, indeed sometimes impossible, task in attempting to claim the lower tax rate to which they are, in theory, entitled. What’s more, in many cases companies may end up with a higher tax liability applying the new provisions due to the pooling amendments introduced.
The draft legislation provides that recipients of dividends paid from EU and tax treaty countries, out of trading profits, can claim to be taxed at 12.5% with credit for overseas tax suffered while dividends from other countries or non trading profits will continue to be subject to tax at 25%. Portfolio investors (holders of not more than 5% shareholdings) in receipt of dividends are treated as receiving dividends from trading profits, taxable at 12.5%.

In theory, Irish holding companies will have the ability to trace dividends and other profit transfers through several tiers of companies to claim underlying tax relief, in respect of tax suffered, on the original source of the profits against Irish corporation tax on dividends ultimately received.

The Department has obviously devoted considerable time to trying to deal with the issues raised by the FII case through this legislation but it doesn’t seem to have contemplated the impracticality of attempting to trace through several tiers of group companies’ records to establish the original source of dividends, confirming the meaning of ‘trading’ profits in the relevant jurisdictions, and then, determining how much of the source profits in question refer to trading profits. These provisions may result in few companies actually claiming application of the 12.5% rate.

To make matters worse, the Bill amends the rules for pooling tax credits to remove the ability to offset excess credits in respect of dividends from EU/treaty countries’ trading profits (12.5% pool) against Irish tax on non EU/treaty or other dividends in the 25% pool while offset is permitted in respect of excess 25% pool credits against the 12.5% pool. Previously, although foreign dividends were taxed at 25%, full credit was broadly available in respect of overseas tax suffered. This limitation will have significant adverse effects as it is usually dividends from EU/treaty countries rather than tax havens, for example, which are likely to suffer higher tax, and it is these very credits that are to be restricted.

We hoped for measures to position Ireland as a credible holding company location vis a vis classic locations such as Netherlands and Luxembourg. Unfortunately the proposals don’t compare very well with their straightforward dividend exemption regimes.

Broader Scope for Securitisation
The widening of the tax neutral securitisation regime to include ‘greenhouse gas emissions allowances’ which broadly refer to rights granted by a State or a supra-national institution to emit a specified amount of carbon dioxide or other greenhouse gas (i.e. carbon credits) is very welcome. Furthermore, instruments used to sell, transfer or otherwise dispose of such allowances will be exempt from stamp duty.

This is an example of the type of innovative measures we need to build on the success of our established industries, such as securitisation to attract further high-value business. The legislative confirmation of the established Revenue practice of treating insurance and re-insurance policies as qualifying assets for securitisation purposes should aid the establishment of new special purpose reinsurance vehicles. The new provisions which confirm that qualifying securitisation SPVs can hold interests in partnerships where the partnership holds only qualifying ‘financial assets’ is also a helpful clarification to the securitisation sector.

Progress for Funds
The long sought-after amendments to reduce the administrative burden of Irish investment funds in respect of the 8 year deemed disposal rules, by placing Irish resident investors’ rights and obligations on a self-assessment basis are finally being introduced (assuming current drafting flaws are ironed out prior to the passing of the Act).

There were also important changes which allow reorganisations and amalgamations to be effected at sub-fund level in a tax-efficient manner. The tax reliefs will apply even if, for example, only one sub-fund of an umbrella fund is being reconstructed, whereas previously, all sub-funds had to be part of the restructure. This, combined with the new measures providing relief from stamp duty on certain reconstructions and amalgamations, will help ensure rationalisation of fund ranges, which commonly occur, will be as efficient and competitive as possible.

Insurance Improvements
The Bill allows companies which write, or have written, credit insurance to take account of movements in their statutory equalisation reserve when calculating their taxable trading income. Until now, appropriations of profit to and from this reserve were disallowed for tax purposes.

Companies that underwrite credit insurance risks have been required to establish and maintain an equalisation reserve for regulatory purposes to offset any technical deficit or above average claims ratio since July 2006, under the Reinsurance Directive. The proposed legislation is retrospective to the introduction of those rules.

There has been a welcome extension of the exemption from withholding tax for payments made in respect of gross roll up life policies. It will now be possible to make payments gross where the life company which commenced the life policy underwrites the business from Ireland on a freedom of services basis across the EU (or a similar arrangement in an EEA country) and the policyholder resides in the EU or in an EEA State. For the exemption to apply the life company must receive written approval from the Revenue Commissioners however.

Other changes of interest…
Preliminary Tax payment transitional rules, which were put in place in relation to accounting rule changeovers, were extended. These provide that the calculation of advance preliminary tax does not have to take into account unrealised gains and losses on financial instruments in the last two months of the accounting period. This compensates a little for the failure to extend the small company rules based on 100% of prior year liability across the board, although it will give rise to its own complexities in practice.
The extension of stamp duty intermediary relief to securities transfers reported to financial services regulatory authorities under MiFID and the relaxation of conditions for exemption on the transfer of loan capital as well as innovative proposals for the introduction of e-stamping are all very welcome.

It is good news that the practice of calculating relief for foreign taxes on foreign profits of Irish head offices of Irish resident companies and their foreign branches is being confirmed.

As well as confirming the Budget day announcement that 2003 will remain the base year for the R&D expenditure credit regime, for all accounting periods commencing before 2014, the Bill provides that for later accounting periods, the base year will be a corresponding year ending 10 years before the end of the claim year, e.g. for 2014, the base year will be 2004 and so on. These improvements address many concerns about the initiative.

It is a pity that the draft provisions which extend the favourable remittance basis of tax (broadly available to expatriates on certain foreign, but not UK, income and gains) to UK income do not extend to UK capital gains. This seems to be another example of a deliberate attempt to address EU concerns in as narrow a manner as possible when some commercial benefits may be available from a broader application.

The decision by the Minister to follow the recommendations of the independent report he commissioned and not to introduce the stamp duty on property measures relating to resting on contract, licences and agreements for lease, announced in the latter stages of last year’s Finance Act, is welcome as the draft measures raised issues of very significant concern and in our view, the legislation should be removed from the statute books so that it is not hanging over the industry.

In the continuing drive towards a ‘green’ tax code, the Bill introduces a system of 100% accelerated capital allowances on certain specified energy efficient equipment for a trial period of 3 years. The Minister has also announced that environmental issues will be at the top of the new Commission on Taxation’s agenda. We hope they will look to the example of the US which we have highlighted in a previous

Tax Monitor to utilise tax policy to encourage the financial sector to get involved in investment of risk capital in renewable energy to have a real chance of meeting the targets Ireland has set itself under its contribution to commitments given by the EU under the
Kyoto Protocol.

On the whole
Except for the disappointing changes in the treatment of foreign dividends, the Finance Bill contained no major unwelcome surprises and it is refreshing to see many of industry’s recommendations acted upon.

However in two of the key areas of change, the taxation of dividends and the new VAT on Property regime, it seems as though the focus given to solving some of the technical problems of the old regimes has created some extremely complex new provisions. In the case of the dividend regime, the rules may increase the tax cost and will not be workable in practice for many companies. The rules are not commercial when compared to other holding company regimes.

Regarding the VAT on Property regime, only time will tell whether it will meet its objectives in the long run or whether it will simply introduce a new range of uncertainties for business, practitioners and Revenue alike.

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