Internationalisation

Holding Companies

Investing into Ireland
Holding Company legislation has put Ireland in a position to compete with established
European holding company locations. An Irish company can act as a European/
Regional holding or Intermediate holding company.
The key benefits relate to the treatment of capital gains and foreign dividends.

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Foreign Dividend Income
Although foreign dividend income is liable to tax in Ireland it is possible to gain
relief so that no further Irish tax will apply.

Companies may gain tax relief through:
1. Foreign tax credit pooling;
2. EU Parent Subsidiary Directive;
3. Double taxation agreements.

 

Dividends paid by a company located in the EU or in a country with which Ireland
has a double tax agreement (including agreements which are signed but not yet
ratified) are liable to corporation tax at the 12.5% rate provided the dividend is paid
out of ‘trading profits’.

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If part of the dividend is paid from non trading profits and part from trading
profits, the non trading balance will be taxed at the 25% rate. However, in
accordance with EU legislation, Ireland follows the ‘de-minimis rule’, which states
that under certain conditions the whole of dividends are to be taxed at 12.5%,
regardless of whether a portion is derived from non trading profits.

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Tax Credit Pooling
‘Onshore Pooling’ allows foreign dividends to be pooled together, before they are
offset against the Irish tax liability. However, excess tax on foreign dividends liable
at a rate of 12.5% cannot be used against those liable at the 25% rate.
The tax credits do not need to be utilised in the year in which the dividend is
received. They can be carried forward indefinitely or offset against Irish tax on
future foreign dividends.

The De–Mi nimIs Rule
In order to satisfy this rule, 75% or or more of the dividends must consist
of trading profits from the paying company or from dividends received by
it from trading profits of lower tier companies resident in the EU or in a tax
agreement country. In addition, the aggregate value of trading assets of the
dividend recipient company and of its subsidiaries must be greater than 75%
of the aggregate value of all their assets (within the accounting period in which
dividend is received).

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Tax Credit Pooling
‘Onshore Pooling’ allows foreign dividends to be pooled together, before they are
offset against the Irish tax liability. However, excess tax on foreign dividends liable
at a rate of 12.5% cannot be used against those liable at the 25% rate.
The tax credits do not need to be utilised in the year in which the dividend is
received. They can be carried forward indefinitely or offset against Irish tax on
future foreign dividends.

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EU Parent Subsidiary Directive
The European Union Directive requires that Member States eliminate double
taxation of dividends received by a parent company located in one Member State
from its subsidiary located in another.

At present, since a subsidiary company is taxed on the profits out of which it pays
dividends, the Member State of the parent company must either:
1. Exempt profits distributed by the subsidiary from any taxation; or,
2. Grant a credit against its own tax in relation to the tax already paid in the
Member State of the parent subsidiary.

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Foreign Tax Credits
Irish tax resident companies are liable to pay Irish corporate tax on their worldwide
income. A foreign branch of such a company is simultaneously liable to both
foreign and Irish tax. In order to eliminate double taxation, Ireland offers a pooling
provision which enables companies offset the foreign tax as a credit against the
Irish corporation tax liability. The extent of the credit depends on the nature of
the profits, and hence whether they are taxed in Ireland at 12.5% or 25%, but in all
cases is limited to the Irish tax on the income item. This pooling provision allows for
the fact that foreign branch profits may be taxed at a variety of tax rates and looks
at the overall rate, not at the rates country by country.

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Repatriation of profits and Irish withholding tax
A withholding tax of 20% applies to dividends and other profit distributions made
by an Irish resident company. However, extensive exemptions are available in cases
of certain payments to certain shareholders, including:
— Irish tax resident companies;
— Charities and pension funds;
— Certain collective investment funds;
— Certain employee share ownership trusts; and,
— Certain companies and individual residents in other EU Member States, or
countries with which Ireland has a tax treaty.

Dividends and other profit transfers from Ireland do not have to be in euro, any
currency can be used.

For the parent subsidiary directive to apply, a relationship of no less than a 10%
shareholding must exist.

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Double Taxation Agreements
To facilitate international business, Ireland has signed comprehensive double
taxation agreements with 72 countries. These agreements allow the elimination or mitigation of
double taxation.

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In addition, where a double taxation agreement does not exist with a particular
country, unilateral provisions within the Irish Taxes Acts allow credit relief against
Irish tax for foreign tax paid in respect of certain types of income.