Many of the world’s biggest and most successful companies across a range of industry sectors have chosen to establish considerable operations in Ireland. These companies are involved in a wide range of activities and sectors including technology, pharmaceuticals, biosciences, financial services and manufacturing. It is no surprise that Ireland has been placed fourth in Forbes’ annual Best Countries for Business List. Ireland’s attractiveness as an investment location can be attributed to the positive approach of the Government to the promotion of inward investment, its membership of the European Union (EU), the ease of establishing a foreign-owned limited liability company, a very favourable corporate tax rate and a skilled and flexible labour pool.
Establishing a Company
In the modern business world, incorporating a company and the legal structure that an entity takes is a critical decision. The 2010 World Bank Investing across Borders report states that Ireland has ‘one of the simplest and shortest processes’ to establish a foreign-owned limited liability company. The correct structure can provide substantial advantages for those undertaking commercial affairs. These advantages include limited liability, separate corporate personality, and possible advantageous taxation. The Companies Act 2014 ‘The Act’ provides for a number of distinct corporate entities such as private companies limited by shares; private companies limited by guarantee and having a share capital; companies limited by guarantee without a share capital; public companies and private and public unlimited companies.
The most common type of companies formed in Ireland are private companies limited by shares. The Act created two types of private company limited by shares, the Designated Activity Company (DAC) and the Private Company Limited by Shares (LTD). The DAC bears a significant resemblance to the private company limited by shares which existed under the previous Companies Acts of 1963 - 2013. Some types of companies such as a licensed bank or a company that has debt securities listed or admitted to trading on a market must register as a DAC.
The LTD company type is more commonly adopted by companies in Ireland. The LTD benefits from most of the innovations introduced by the Act intended to simplify their administration. The LTD is governed by a single, simplified constitutional document without an objects clause which eliminates the restrictive nature of company objects. Although the LTD can have an authorized share capital, it is not a necessary requirement and it may choose to have no authorized share capital. A LTD company can have a minimum of one Direct
Irish tax law offers many taxation benefits to companies wishing to set up operations in Ireland. The primary benefit, from a tax perspective of doing business in Ireland, is Ireland’s standard corporation tax rate of 12.5 per cent. We examine the Irish tax advantages with regard to the setting up of either a trading or holding company in Ireland.
Irish Trading Structure
Low rate of Irish corporation tax
Ireland has a standard rate of corporation tax (CT) for Irish companies of 12.5 per cent for all trading income. A higher rate of 25 per cent applies to foreign income, passive income such as interest, rental and other non-trading income.
Where an Irish company is managed and controlled in Ireland and generates the requisite level of substance in Ireland, the Irish CT rate of 12.5 per cent will apply to the company’s trading profits. The requisite level of substance is normally achieved through the Irish company satisfying a number of issues, including, but not limited to the setting up of an office situate in Ireland, to generate a physical presence in Ireland and also the employment of a suitably skilled Irish employee to carry out the company’s key management activities. Where the appropriate level of substance is not achieved by the Irish company, the Irish CT rate of 25 per cent will apply to the Irish company’s trading profits.
Acquisition of intellectual property for trading purposes
The Irish tax regime provides a tax deduction for the capital cost of acquiring specified intangible assets which are used for the purposes of a company’s trade. The term ‘specified intangible assets’ is widely defined and includes, but is not limited to; patents, trademarks, licences, copyrights, computer software, brands, industrial know-how, and goodwill directly attributable to any of these intangible assets. Furthermore, Irish tax legislation provides for a Stamp Duty exemption on the acquisition of intellectual property.
Knowledge Development Box
The Finance Act 2015 introduced the Knowledge Development Box (KDB) into Irish tax legislation. Under the KDB, trading profits earned by an Irish company from patented inventions and copyrighted software are to be taxed at a rate of 6.25 per cent to the extent that those profits are related to any research and development (R&D) undertaken by the company.
Research and Development tax credit
In instances where a company trading in Ireland incurs expenditure on R&D activities within Ireland (or within the EEA) it shall be entitled to a tax credit of 25 per cent in respect of that expenditure. This is in addition to the normal tax deduction of 12.5 per cent obtained for the R&D expenditure, i.e. the company effectively obtains an overall 37.5 per cent tax deduction for the R&D expenditure.
Example for illustrative purposes:
Case: Irish company with a period end of 31 December
During 2017 the Irish company will incur qualifying R&D expenditure on salaries and general overheads of €1,000,000.
The company’s taxable profits for the period ending 31 December 2017 after an allowable tax deduction for the R&D expenditure of €1,000,000 will be €4,000,000.
The company’s taxable profits of €4,000,000 will give rise to a corporation tax liability of €500,000, (i.e. €4,000,000 at 12.5 per cent) for 2017 before the deduction of the R&D credit.
The R&D credit of 25 per cent will be calculated on the R&D spend of €1,000,000. This results in a R&D credit of €250,000.
This R&D credit can be deducted from the corporation tax liability of the company, i.e. €500,000. This will result in a revised corporation tax liability of €250,000
The R&D credit of 25 per cent, together with the corporation tax deduction allowed for the R&D expenditure of €1,000,000 results in a total tax saving for the Irish company of 37.5 per cent, i.e. €375,000 in 2017.
Irish Transfer Pricing Regime
Ireland has introduced a transfer-pricing regime. However, it only applies to trading transactions and there is a generous exemption for ‘small and medium sized’ companies.
Irish Holding Company Structure
Ireland is considered to be a very attractive holding company location, the main benefits of which include:
Favourable Irish tax treatment of dividend income.
No Irish dividend withholding tax on dividends from the Irish holding company to EU / tax treaty countries.
No Irish capital gains tax on disposal of shareholdings in qualifying subsidiaries.
Favourable Irish tax treatment for interest on qualifying borrowings.
No thin capitalization provisions.
No controlled foreign corporation rules.
Extensive tax treaty network.
The combination of the youngest population in Europe, with one third of the population under 25 years old and high standards in education has meant that, while companies may locate here initially for low corporation tax, they continue to invest in Ireland because of the young, talented workforce. The Irish education system ranks in the top ten countries in the world and according to the OECD, 52 per cent of 25-34 year olds have a third level qualification, 10 per cent higher than the OECD average. The IMD World Competitiveness Yearbook 2016 lists Ireland as the first for flexibility and adaptability of workforce and third most productive workforce in the world. The Special Assignee Relief Programme provides for relief from income tax for staff assigned from abroad to work in Ireland and can facilitate key personnel and the business in moving to Ireland.
The IMD World Competitiveness Yearbook 2016 ranks Ireland very favourably in a number of key areas which are important for Foreign Direct Investment:
Establishing a presence in Ireland provides a gateway into Europe, the world’s largest single market, with barrier-free access to over 500 million consumers. Ireland’s geographic location, transport links to Europe, the US and the Middle East provides easy access to international markets. Ireland has long been marketed as the land of a hundred thousand welcomes, Céad Míle Fáilte in Irish, which is evidenced through the growing number of diverse multinationals and nationalities working in Ireland. Ireland is the only English speaking country in the Eurozone, fostering continued close ties with the UK and the USA.
In conclusion, it is clear from the above that Ireland has a number of unique factors which have lead to the country becoming a destination of choice for international companies to access the EU internal market. Ireland’s competitive tax regime, regulatory framework, the availability of talented workers from within the EU and outside, and our access to EU markets is central to its ability to attract investment over other EU countries.
From our experience of working with our International clients we have developed both an understanding and a significant level of experience of the above factors and their importance to investors in establishing operations in Ireland.
Pearse Trust Limited, Dublin, Ireland