Holding Company - Tax Treatment in Ireland

Irish Incorporations Ltd. can assist clients with the establishment of International Holding Companies by utilising Ireland’s favourable tax treatment of Holding Companies.  In particular Irish Holding Companies confer capital gains participation exemption, generous foreign tax credit system, membership of the EU, comprehensive double tax treaty network, lack of CFC and thin capitalisation. Recent amendments in the Finance Act 2010 (the “Act”) can be seen as continuing evidence of the Irish government’s commitment to attracting holding companies to Ireland.

 The key tax issues to consider when establishing an Irish holding company are highlighted below.

• Incorporation of holding company
• Taxation of Irish holding companies
• Disposition of shares in an Irish holding company
• Ceasing operations in Ireland
• Tax treaty network
  

Incorporation of Irish Holding Company

A holding company incorporated in Ireland must take one of the forms provided for by Irish corporate law. The most commonly used structure for a holding company is a private limited liability company or a private unlimited liability company. There are no minimum equity requirements for an Irish private company.  In accordance with Irish corporate law financial statements must be prepared and filed on an annual basis with the Irish Companies Registration Office.

Tax Treatment of Holding Companies

Ireland has an extremely favourable corporation tax rate of 12.5% on trading profits which is one of the lowest in the EU and EFFA countries.  Passive income earned by a company is taxed at a rate of 25% and capital gains not qualifying for any relief or exemption are  taxed at 25%.

Capital Gains Tax Participation Exemption on Disposal of Shares

A disposal of shares in a subsidiary company by an Irish holding company will be exemption Irish capital gains tax provided the following conditions are met; 

• The holding company must have held at least 5% of the ordinary share capital (including the rights to profits and assets on a winding up) for a continuous 12 month period and the disposal must take place during or within 2 years after the date of meeting the aforementioned holding requirement.  Therefore if a disposal is made which brings the shareholding below 5% the remaining shareholding will still qualify for the participation exemption provided the remaining shares are disposed of within 2 years.

• The shares being disposed of must be of a company tax resident in a country with which Ireland has concluded a double tax treaty or in a country with which Ireland has signed but not yet ratified a double tax treaty or in a country resident in an EU Member State. 

• At the time of disposal, the shares being disposed of must be of a company whose business consists wholly or mainly of the carrying on of a trade or trades, or if taken together, the businesses of the holding company and that of the companies in which it has a direct or indirect 5% or more holding, consist wholly or mainly of the carrying on of one or more trades.

Residence Test

The investee company (“Qualifying Companies”) must be resident for tax purposes in Ireland, in another EU Member State or in a country with which Ireland has a tax treaty.

Taxation of Dividend Income

Dividends paid by a company located in the EU or by a company resident in a country with which Ireland has concluded a double tax treaty or signed but not yet ratified a double tax treaty (“Qualifying Companies”) to an Irish company may be liable to Irish tax in the following manner:

Dividends paid out of “trading profits” will be chargeable to corporation tax at the rate of 12.5% (as opposed to 25%). In the majority of cases the application of the 12.5% rate of corporation tax and double tax relief should ensure that no further Irish tax arises on such dividends. The 12.5% rate will also apply where the dividend is paid out of dividends received by the foreign company from the trading profits of its subsidiaries. If only part of the dividend is derived from “trading profits” then the requisite part of the dividend will be liable to tax at 12.5% with the balance taxable at 25%.  Where 75% or more of the profits of the dividend paying company are trading profits of that company or dividends received by it out of trading profits of lower tier companies that are Qualifying Companies and their trading assets constitute more than 75% of the aggregate value of all of their assets all of the dividend will be subject to tax at the 12.5% rate (even though a percentage of the dividends is not derived from trading profits). “Portfolio Dividends” (i.e. dividends arising on holdings of 5% or less) will also be taxed at the 12.5% rate provided the portfolio dividend is received from a Qualifying Company.  Dividends received from other Irish tax resident companies are generally exempt from tax.

Repatriation of Dividends from Ireland

Withholding tax of 20% must be applied in respect of dividends paid and other profit distributions made by companies resident in Ireland. The obligation to withhold tax is placed on the company making the distribution. Exemption from dividend withholding tax is available to non-resident shareholders in the following circumstances:

• under domestic law, where the dividend is paid to individual recipients resident in the EU or in a country with which Ireland has concluded a double tax treaty or in a country which Ireland has signed but not yet ratified a double tax treaty (“Qualifying Country”);

• under domestic law, where the dividend is paid to a company resident in a Qualifying Country and which is not controlled (more than 50%) by Irish residents;

• under domestic law, where the dividend is paid to a company that is under the ultimate control of persons resident in a Qualifying Country;

• under domestic law, where the dividend is paid to a non-resident company, the principal class of whose shares is listed and regularly traded on a recognised stock exchange in a treaty country or another Member State, or on another stock exchange approved by the Minister for Finance. This exemption also applies where the recipient of the dividend is a 75% or more subsidiary of such a listed entity;