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Ireland is a small, open, trade-dependent economy. Its openness is reflected both in the international mobility of its labour and capital reflected by strong migration flows and high levels of foreign direct investment.
It is strategically located on major air and sea routes between North America and Northern Europe. Over 40% of the population resides within 100 km of Dublin, the Capital City. Ireland is also a member of the Euro single currency.
There are a number of issues which you must consider when you are looking to set up your business in Ireland. This document takes you through some of the common questions we come across and gives you practical information about the issues you need to consider.
What type of Business Structure should we use?
There are advantages and disadvantages to all of them, and there is no one correct answer, it’s all dependent on your specific business circumstances and needs. A brief overview of the main structures is set out below:
Establishment (a branch of your overseas business)
- Not a separate legal entity but an extension of the overseas parent company
- No limited liability or ring-fencing of the Irish operations
- If there is a permanent establishment (PE) in Ireland then profits from this PE are liable to Irish Corporation tax (12.5% trading rate, otherwise a 25% rate applies).
- The disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State are set out in Part 21 of the Irish Companies Act 2014. There are some differences between the requirements imposed on a company from a Member State of the European Economic Area and companies from other countries.
Limited Company (LTD) and Designated Activity Company (DAC):
- Both LTD and DAC provide limited liability to Irish operations
- A DAC must have at least two directors and must have a clause in it’s Constitution stating it’s objects
- A LTD can operate with a single director.
- Corporation tax payable on company profits (12.5% trading rate, otherwise a 25% rate applies).
- A company may elect to dispense with an annual audit if two or more of the following criteria in respect of their financial statements are met:
- Annual turnover does not exceed €8.8m
- The balance sheet total assets does not exceed €4.4m
- Less than 50 employees
- A company must evidence it is managed and controlled in Ireland in order to claim Irish tax rates.
Public Limited Company
Public limited companies have the same essential characteristics as private limited companies but the key differences are:
- Must have at least two directors
- Must have a clause in it’s Constitution stating it’s objects
- Shares in a public limited company are freely transferable
- There is no restriction on the number of members but the minimum number is one
- Shares may be issued to the public and may be listed on a stock exchange
- Additional reporting and capital requirements apply to such companies
How much Corporation Tax (CT) will the business pay?
Ireland has traditionally directed its tax incentives towards active business income – notably, the standard 12.5% rate of corporation tax on trading income, which is exceptionally low in an EU context. Corporation Tax is charged at 12.5% on all Irish corporate trading profits, with the exception of mining, petroleum activities and dealings in land. All other corporate income (including passive/unearned income) is taxed at 25%. Capital gains on disposals made by a relevant company are taxed at a general rate of 33% of the chargeable gain.
What if we use Ireland to set up our holding company?
In addition to an attractive standard corporate tax rate of 12.5%, Ireland also offers a number of additional tax incentives for Irish businesses including:
- Holding Company Regime;
- Research and Development (R&D) Tax Credit;
- Knowledge Development Box (from 1st Jan 2016 potential for a reduced effective CT rate of 6.25%);
- Allowances and Stamp Duty reliefs for Intellectual Property;
- Film Relief;
- Start-Up Companies Relief;
- Special Assignee Relief Programme (‘SARP’);
- Tax regime for Real Estate Investment Trust (‘REIT’) companies;
- No thin capitalisation or controlled foreign corporation (‘CFC’) rules; and
- Double Taxation Agreements signed with 72 countries of which 70 are in effect (http://www.revenue.ie/en/practitioner/law/tax-treaties.html).
Ireland does not impose any withholding taxes on the repatriation of branch profits to head office (as the branch and head office are a single legal entity).
It has a dividend withholding tax regime. Subject to certain exemptions, Irish resident companies (with the exception of certain fund vehicles) are required to withhold tax at the standard rate of income tax in respect of all dividends paid. The standard rate is currently 20%. The obligation to withhold tax is placed on the company paying the dividend or in certain circumstances on a withholding agent acting for the company. Certain exemptions are available from Irish withholding tax, in particular, where the recipient of the dividends is in, or is controlled from, an EU Member State (other than Ireland) or in a country with which Ireland has a double taxation treaty.
Irish tax legislation allows for members of a 75% group to surrender excess trading losses, trading charges, management expenses and Irish rental capital allowances between them.
What if we make cross-border transactions between group companies?
Ireland follows internationally recognised Transfer Pricing (TP) rules where cross-border trading and financial transactions between affiliated entities have to be conducted on an arm’s length basis. The price and terms should be the same as if the transactions had been between completely independent parties. The transactions that fall under Irish transfer pricing rules are those which are between connected parties carried out at arms length that:
- Involve the supply and acquisition of goods, services, money or intangible assets, and
- Form part of the trading activities of either party.
Where under an arrangement to which these provisions apply an amount receivable in respect of a sale is understated or the amount payable in respect of an expense is overstated then the arms-length amount will be substituted in each case.
SME’s are generally exempt from Ireland’s transfer pricing (“TP”) regime, so only “large” entities need to undertake detailed TP analysis. A “large entity” for TP purposes is one with greater than 250 employees, or less than 250 employees but with Revenues greater than €50M and Gross Assets greater than €43M. Irish legislation requires that documentation be available that would be sufficient to show that the pricing of transactions with connected persons complies with the arm’s length principle. The documentation must be prepared on a timely basis, in written form in an official language of the State or by means of any electronic, photographic or other process as permitted for accounting records and be made available to Revenue on request within 21 days.
However even if an entity is exempt from Ireland’s transfer pricing regime it may fall under the scrutiny of the other international tax jurisdictions where it transacts. There may also be other tax regulations which ensure transactions are undertaken at a commercial value.
A business will need to prepare a Transfer Pricing Report proving the arm’s length basis of transactions. The report should include a functional and risk analysis, analysis of the adopted pricing model and benchmarking of the arm’s length basis.