Tax efficiency of an Irish Holding company
Company Bureau Formations
13 September, 2018
It is well known that many high-profile companies operate under a holding company in Ireland. Global social media and technology groups from the US and the UK have redomiciled their headquarters in Ireland to take advantage of the favourable tax rates. Although these companies attract the most media attention, this are a wide range of corporates who enjoy the benefits of a holding company in Ireland including private equity funds, sovereign wealth funds, alternative investment funds and family offices.
Ireland can provide an efficient structure for financing, funds flow and profit extraction for multinational groups. In this article, the advantages of setting up an Irish Holding company are explained.
What is a holding Company?
A holding company is a parent company that is a majority shareholder of other companies; holding 51% or more of shares. An Irish holding company can be the majority shareholder of local or overseas companies; these companies under the holding company are known as subsidiary companies. Irish holding companies are typically formed as a Limited Companies.
Many corporates choose to establish Irish holding companies because they are eligible for the low corporation tax rate of 12.5%. There are also withholding tax exemptions, a capital gains participation exemption, onshore pooling of dividends and Ireland holds double taxation agreements with more than 50 countries. However, there are many other factors that make Ireland an attractive option such as:
- Ireland is a member of the OECD (Organisation for Economic Co-operation and Development) an intergovernmental organisation with 36 member countries, founded to stimulate economic progress and world trade
- Ireland is a common law jurisdiction offering a clear and certain legal system for investors
- Ireland is an established international services hub with a skilled and educated workforce particularly, in pharmaceutical, social media and technologies.
- There is availability of office space at lower service costs compared with other European cities
- An English-speaking member of the EU
- There are many international companies operating in Ireland, attracting a young talented workforce, many of them bilingual.
The introduction of a holding company in Ireland has the ability to tap into skillsets, infrastructure and people which are already in place, providing value to a group's holding company structure.
When considering establishing a holding company in Ireland it is important to determine whether a Double Taxation Agreement exists between Ireland and the subsidiary country of residence. Ireland holds tax treaties with 73 countries (72 of which are in effect). Double taxation can occur when someone is tax resident in one country and receives income from another country. Double taxation treaties protect individuals, ensuring that tax is only payable in one country.
If an Irish holding company and its subsidiaries are structured in jurisdictions where are agreement exists a more favourable tax rate can be attained. For example, any license fees will be taxed in the jurisdiction where the holding company is registered rather than the jurisdiction where the subsidiary trading company is registered. Royalty payments may also be classed as necessary business expenses and deductible from taxable income.
Capital Gains Tax Exemption
For Irish holding companies, profits arising from the disposal (sale) of shares are tax exempt when certain criteria are met:
- A minimum of 5% of the ordinary shares must have been held for at least 12 months prior to disposal and
- the shares are of a subsidiary company that is resident in an EU or treaty state; and
- the subsidiary is a trading company or the business of the holding company.
The exemption can also be applied to options of shares or bonds convertible into shares; there is no advance tax authority clearance required.
An Irish holding company can receive dividends from another Irish resident company and enjoy exemption from corporation tax. Although, foreign dividends are taxable, a credit is available for foreign withholding and underlying tax. This credit applies to tax paid by a direct subsidiary as well as a subsidiary further down within the group structure where the Irish company has at least 5% control.
Ireland's 12.5% tax rate can apply to certain 'trading' dividends and there will often be no Irish tax to pay on them. Additionally, any excess of foreign tax may be set off against Irish tax on other trading dividends or carried forward. Other 'non-trading' foreign dividends are taxed at the rate of 25%.
Ireland's 12.5% rate applies to:
1. dividends from other EU or treaty countries which are sourced from trading activities; and
2. dividends from foreign portfolio companies (less than a 5% interest).
The conditions for the 12.5% rate are:
- 75% or more of the dividend-paying company's profits are trading profits and dividends received from trading profits of lower-tier companies are also resident in an EU or treaty country; and
- the total value of the trading assets of the dividend receiving company plus its subsidiaries must not be less than 75% of the value of all their assets.
Tax Deductions for Financing
An Irish holding company may be financed principally by debt due to limited restrictions on interest deductibility. A tax deduction can be available for interest on funds used to acquire ordinary shares of a trading company. A deduction may also be available for funds lent to trading subsidiaries provided they are used exclusively for the subsidiary's trade.
Drawing profits from an Irish holding Company
Generally, there is no capital gains tax when an Irish company's shares are disposed of by a non-Irish resident. However, capital gains tax is due if the Irish company generates the majority of its value from land or mineral rights in Ireland.
Dividend withholding tax in Ireland is 20%, however, there are exemptions. There is no withholding tax on payments to residents of EU/treaty states. Additionally, payments to an overseas company that is ultimately controlled by EU treaty state residents (other than Ireland) should also be exempt from withholding tax.
In Ireland, there is also 20% withholding tax on interest but this is tax exempt if payments are made to companies in an EU or treaty state (this also applies to listed bonds).
In Ireland, there is generally stamp duty on share subscriptions or debt financing or when transferring shares. For holding companies there is also generally no stamp duty arising from the acquisition of shares in non-Irish companies. However, transfers of shares in an Irish company are subject to 1% stamp duty which may be subject to certain reliefs and exemptions. In a group holding company structure, it is not likely that shares will be regularly bought and sold. In a public company context, there are various methods of reducing or eliminating the tax to allow for the stamp free trading of shares.
Local holding companies
Ireland's tax efficient system makes it a natural choice within Europe to base a holding company for group or investment structures. Ireland has seen great success attracting in leading international companies who base significant operations and staff in Ireland.
If you would like more information on the topics covered in this article or if you would like to incorporate an Irish Holding Company, please contact the experts at Company Bureau. We are experts in the field of company formations and corporate services. To learn more about forming an Irish company, please click here.
Disclaimer: This article is for guidance only and does not constitute tax advice. Please seek professional or legal guidance before acting on any of the contents in this article.
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