Holding Companies : The New Regime
Author:
Martin Phelan
Section 49 of the Finance Act 2005 amends the taxation regime introduced last year for Headquarters and Holding Companies in Ireland in regard to the valuation of certain shareholdings in such companies. This will satisfy the requirements of the European Commission’s clearance of the scheme as not being a state-aid.
SUMMARY OF NEW PROVISIONS
The new holding company regime is comprised of two components, a capital gains tax exemption applicable to disposals of shares in subsidiary companies, and an improved tax credit system for dividends received from foreign subsidiaries. These new provisions combine with a number of existing tax features to make Ireland a very attractive holding company jurisdiction.
CGT exemption for subsidiary share disposals
Capital gains realised on or after 2 February 2004 on the disposal by an Irish resident company of shares in another company (Irish or foreign) will be exempt from Irish tax, provided that the following criteria are met:
-The shares disposed of must be held in a company that is, at the time of the disposal, resident for tax purposes in either an EU Member State (including Ireland) or a country with which Ireland has entered into a double taxation treaty.
-The company that disposes of the shares must have held (either directly or indirectly) at least 5% of the issued share capital of the subject company (based on votes and value) for a continuous period of 12 months or more ending either at the time of the disposal or at any time within the 2 year period preceding the disposal. This does not mean that shares representing 5% or more in the subsidiary company need to be disposed of to qualify for the exemption. Shares held by companies in the same 51% controlled group can be aggregated for the purposes of applying the 5% test.
-Either the subject company alone, or alternatively the combination of the subject company, the disposing company, and every other company in which the disposing company holds a 5% or more equity interest, considered as a whole, must exist wholly or mainly for the purposes of carrying on a trade or trades.
-The shares disposed of must not derive the greater part (i.e. >50%) of their value from land or mineral rights in Ireland, or be held as part of a foreign life business fund.
Where the above criteria are met, the exemption will also extend to disposals of certain assets related to shares, including options over shares, securities convertible into shares or options to acquire securities convertible into shares.
Improved tax credit system for dividends received from Foreign Subsidiaries
Dividends received by an Irish resident holding company from its Irish resident subsidiaries are not subject to Irish tax. However, dividends received from foreign subsidiaries are generally subject to tax in Ireland at a rate of 25%.
It was hoped that, in enacting the new holding company regime, the Irish Government would provide complete tax exemption for foreign dividends received by Irish resident companies. Instead, however, the Government opted to expand and improve the existing tax credit system available for foreign dividends.
The following is a summary of the current rules applicable to dividends received by an Irish resident company from its foreign subsidiaries after the improvements:
-Foreign dividends received by an Irish resident company are subject to corporation tax in Ireland at a rate of 25%.
-Where the Irish company holds 5% or more of the issued share capital of a foreign company, Ireland will, in respect of dividends received from such company, give tax credit for both foreign withholding taxes paid on such dividends and for underlying corporate taxes paid by the paying company in its home jurisdiction. This credit applies not only in respect of national taxes, but also state and local taxes that are imposed based on income. In the absence of an applicable treaty requiring these credits, the tax credits are given unilaterally by Ireland.
-Irish resident holding companies will now be entitled to “pool” foreign tax credits for dividends received from different companies and different jurisdictions. Previously, this pooling could only be accomplished through the use of an offshore mixer company. Under the new rules, credits that cannot be pooled and used in a year will be available for carry-forward to future years.
OTHER HOLDING COMPANY INCENTIVES
Some of the existing tax features that contribute to Ireland's attractiveness as a holding company jurisdiction include:
-Irish Withholding Tax exemption on Dividend and Interest Payments made to EU member states and Tax Treaty countries
Ireland does not, as a general rule, impose withholding taxes on either interest or dividend payments made by an Irish resident company to a foreign parent company that is located in either an EU Member State or a jurisdiction with which Ireland has entered into a double taxation treaty. In the case of dividends, this exemption is extended to also apply to a recipient company that is not resident in such a country, but which is ultimately controlled by persons that are so resident
These exemptions from Irish withholding taxes apply under Irish domestic tax legislation and are not dependent on treaty relief. In some cases, however, administrative requirements need to be complied with to avail of the exemptions.
-Tax deduction for debt incurred to acquire shares in Subsidiary Companies
Where an Irish company borrows funds to acquire 5% or more of the shares of a company that is either a trading company, or a holding company of a trading group, interest paid on such debt will generally be deductible for Irish tax purposes. Where the borrowing company cannot utilise this deduction, it is often possible for the borrowing company to surrender the deduction to other Irish resident companies in the same group.
-No Thin Capitalisation rules
Ireland does not have thin capitalisation rules that limit the tax deductibility of interest paid from an Irish resident subsidiary to a parent company in an EU Member State or a tax treaty country, provided that the rate of interest charged does not exceed a reasonable rate.
-No CFC or Transfer Pricing Rules
Irish resident companies are not subject to either controlled foreign company rules (CFC rules), or transfer pricing rules.
-Extensive Tax Treaty Network
Ireland currently has 44 double taxation treaties in force and is in the process of expanding this treaty network through negotiations with a number of countries.
CONCLUSION
The enactment of these new holding company regime provisions, combined with other tax benefits already offered by Ireland, make Ireland a much more attractive jurisdiction in which to locate holding companies for multinational groups.
Martin Phelan FCA, AITI is Tax Partner with William Fry Tax Advisers