Ireland has earned an international reputation for its business-friendly tax policies. Many companies have set up Irish subsidiaries to take advantage of the headline rate of 12.5% corporation tax on trading profits. While this is still a growing business, latterly Ireland has also appeared in other guises in international structures. International groups have moved their corporate headquarters to Ireland, used Ireland as a mid-tier holding company jurisdiction, and used Ireland as a base for a financial services vehicle, often in areas such as leasing and regulated funds.
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Ireland has a stable political regime and operates a common law system. The Irish workforce is well educated and English-speaking. As a member of the European Union, Ireland offers a passport into Europe while at the same time having strong economic links with the US. In the case of a regulated (i.e. investment-related) activity under EU law, establishing in Ireland will usually enable a company to “passport” into all other EU jurisdictions.
Ireland is an onshore jurisdiction, not a tax haven, which greatly enhances its international reputation. Ireland has 62 double-taxation treaties (DTTs), including a very favourable one with China. An Irish element can be useful in investment into, and out of, China in a number of ways.
Tax treaty benefits
The Chinese/Irish DTT is one of the most favourable of China’s tax treaties. The treaty provides that no PRC capital gains tax is payable on the disposal by an Irish entity of Chinese shares. It also provides for a reduced rate of withholding tax of 5% on dividends paid from China to Ireland. In the case of Irish tax, there is no withholding tax on dividends paid from Ireland to China, and no Irish capital gains tax on the disposal of shares in an Irish trading company by a person resident in the PRC.
Irish subsidiaries of Chinese companies
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The low corporation tax rate, onshore jurisdiction and other features make Ireland an attractive choice of location for Chinese outbound investment. The typical structure is an Irish limited liability company which trades from Ireland, thus acting as a platform to access the EU and the rest of the world. In the recent past, aircraft leasing has been an activity that has seen some interest from China, although the rationale for establishing in Ireland for aircraft leasing is equally applicable for many different activities, including, for example, setting up a financial services company or an insurance vehicle.
A-shares and Irish funds
Memoranda of understanding signed in 2008 and 2009 between the Irish and Chinese regulatory bodies allowed Chinese investors and companies to invest in Irish funds and allowed Irish funds to invest directly in China’s A-share market. There are various types of fund structure available in Ireland, although those more commonly used for this purpose are the regulatory professional investor fund (PIF) and qualifying investor fund (QIF). A QIF, in particular, can be authorized within one day of filing of the fund documents with the regulator. A QIF can be a useful vehicle for foreign investment in Irish real estate, where the income and gains can accumulate on a gross roll-up basis, with no Irish tax for non Irish-resident investors.
Holding companies
Irish companies are increasingly being used as holding companies, both at the top of a group structure (many NASDAQ-listed companies are headquartered in Ireland) and at mid-level to facilitate a strategic investment or the holding of intellectual property. In the Chinese context, an Irish holding company can be a useful structure for foreign direct investment (FDI) into China.
An Irish holding company operates under the same law as a trading company. In order to ensure that the company is tax resident in Ireland, the directors must meet in Ireland several times each year. At those meetings, the major decisions must be considered and taken. Using an Irish holding company tends to be a little more expensive than a pure offshore holding company structure, but it is a structure of substance where all the strategic thinking and planning and resulting administrative actions genuinely do take place in Ireland.
Setting up an Irish company
An Irish limited liability company can be set up in two weeks. Unless the company is involved in a regulated industry such as banking or insurance, no prior approval or regulation is required. There are no minimum capitalization rules in Ireland for unregulated companies, and therefore a company can be set up with a share capital of as low as €1. The company must have at least two directors and a company secretary, and will require an external auditor to prepare the annual financial statements of the company. An Irish company can engage in international business, can use any relevant law for its business arrangements, and can maintain bank accounts outside Ireland.
To gain Irish tax benefits (including treaty access), a company must be resident for tax purposes in Ireland. While certain (non-trading) companies can be deemed to be Irish resident by virtue of being incorporated in Ireland, other companies should have their centre of control and management located in Ireland. The test for “central management and control” is not defined in legislation and is generally directed at the highest level of control of the business of the company (i.e. not the day-to-day management). Accordingly, the place where the directors hold their board meetings is of great importance. It is recommended that a majority of an Irish resident company’s board meetings be held in Ireland.
Stability in Ireland
Ireland recently availed itself of a “bailout” funding package from the EU and the International Monetary Fund as a result of crises in the country’s banking sector. While the banking crises have been difficult for individuals in Ireland, with personal income tax rises and job losses, the international business community in Ireland is strong and indeed exports from Ireland rose last year. Morgan Stanley recently suggested that now is the time to “bag a bargain” in the country.
There has been a recent change in government, and the new government has started strongly. The 12.5% corporation tax rate remains a cornerstone of Ireland’s economic recovery and while Ireland is a committed member of the European Union it will continue resolutely to defend its control over its own corporation tax policy. The underlying message from Ireland is that it is very much open for business.
Caroline Devlin is a partner at Arthur Cox in Dublin. She can be contacted on + 353 1 618 0585 or by email at caroline.devlin@arthurcox.com
Jonathan Sheehan is a partner at Arthur Cox in Dublin. He can be contacted on + 353 1 618 0609 or by email at jonathan.sheehan@arthurcox.com
