Ireland Irish holding companies A popular choice

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1 Ireland Irish holding companies A popular choice Introduction Ireland has long been a jurisdiction of choice for the establishment of holding companies. There are a number of reasons for Ireland's popularity. It is an onshore jurisdiction and a long standing member of the European Union and the Organisation for Economic Cooperation and Development. Ireland is a low tax jurisdiction with an extensive network of double tax treaties (70 treaties have been signed of which 64 are in effect). Other factors which favour Ireland is that it is an English speaking country with a pro-business environment. It also has ease of access, being in close proximity to London and other major capital cities with a well serviced airline network. In addition to all of the above, Ireland has a competitive holding company regime the features of which we have outlined below. With any holding company regime, it is necessary to consider the following: 1. taxation of a disposal of shares in a subsidiary company; 2. taxation of dividend income received from a subsidiary; 3. taxation of profits repatriated from the holding company; 4. whether the holding company can be debt funded in a tax efficient manner; 5. exiting the holding company jurisdiction; 6. tax treaty access; and 7. other considerations controlled foreign corporations, thin capitalisation and other rules. Ireland can provide a tax efficient answer in relation to all of the issues outlined above. We have dealt with each of these points in turn below. Disposal of shares in a subsidiary company An exemption from capital gains tax is available for Irish tax resident companies disposing of shares in qualifying subsidiaries. In order to qualify for the Irish "participation exemption", the following requirements must be met: 1. the company in which the shares are being disposed of must be tax resident in an EU Member State (including Ireland), a country with which Ireland has agreed a double tax treaty that has the force of law or a country with which Ireland has signed but not yet ratified a double tax treaty (a "Relevant Territory");

2 Page 2 2. the subsidiary company must be carrying on a trade or be part of a trading group; and 3. the Irish holding company making the disposal must have held at least 5% of the shares in the subsidiary company, for a continuous period of twelve months ending within the previous 24 months. Should the above requirements be met, any gain arising on a disposal of the subsidiary shares will not be subject to tax in Ireland. The rate of capital gains tax otherwise applicable is 33 per cent. Taxation of dividends received A 12.5 per cent or 25 per cent tax rate will apply to dividends received, depending on the source of the dividend. Ireland operates a credit as opposed to an exemption system for dividends received. However, in most cases this will result in no Irish tax payable. Rate of tax At the election of the recipient company, the 12.5 per cent rate will apply to dividends paid by a company resident in a Relevant Territory (excluding Ireland) and certain other jurisdictions (for example Argentina 1 ) where the dividend is paid out of "trading profits" i.e. where the income which generated the dividend is active as opposed to passive income. The 12.5 per cent rate will also apply to dividends paid out of trading profits from companies who are not resident in a Relevant Territory, provided that the company paying the dividend is listed or is a 75 per cent direct or indirect subsidiary of a company that is listed on a recognised stock exchange in a Relevant Territory. There is also a requirement that the shares be regularly traded on that exchange. As noted above, the 12.5 per cent rate only applies where the recipient so elects. In some cases where the recipient avails of the "tax credit pooling" system (described below) it is more efficient not to elect for the 12.5 per cent rate to apply. However, this should be assessed on a case by case basis. In all other cases the dividend received is taxed at 25 per cent. Dividends received by an Irish holding company from an Irish tax resident subsidiary are exempt from Irish tax. Credit for foreign taxes Credit is available against Irish tax payable on the dividend, for foreign tax suffered on the profits (for both tax withheld and underlying corporation tax paid on the profits from which the dividend is derived), provided a qualifying 5 per cent interest is held in the subsidiary company. This should result in most cases in no additional Irish corporation tax being payable. Relief can also be extended to foreign tax suffered by a lower-tier subsidiary where the company paying the dividend has itself received dividends from the lower-tier subsidiary. This is no holding period requirement to avail of the tax credit regime Ireland has recently introduced a system providing for an additional foreign tax credit ("AFTC") where a dividend is received from a company resident in an EU or European Economic Area Member State. The AFTC will provide for a tax credit at the nominal rate of tax in the source jurisdiction as opposed to the effective rate. The system will top up an existing tax credit to a maximum of 12.5 per cent or 25 per cent as applicable 2. The AFTC system is particularly useful where dividends are received from jurisdictions where the nominal tax rate is lower than the 25 per cent rate or the 12.5 per cent rate. Under Ireland's "tax credit pooling" system, where a company receives foreign dividends from different jurisdictions, some carrying credits in excess of the Irish tax due on such dividend, any excess credit can be used to off-set tax due on other foreign dividends, where the underlying tax credit in respect of those 1 This treatment extends to jurisdictions which have ratified the OECD Convention on Mutual Assistance in Tax Matters. 2 The maximum tax credit will be limited by the rate of tax applicable in Ireland i.e. 12.5% or 25%.

3 Page 3 dividends is not sufficient to off-set in full the Irish tax payable. Tax credits on dividends taxed at the 12.5 per cent rate may only be pooled with other dividends taxed at that rate. Finally, excess tax credits can be carried forward indefinitely. Tax credits generated by AFTCs cannot be pooled or carried forward. Repatriation of profits from Ireland Ireland imposes dividend withholding tax at the rate of 20 per cent in respect of dividends or other distributions paid by an Irish tax resident company. However, wide ranging exemptions apply, including but not limited to the following: 1. where the dividend is paid to an individual resident in a Relevant Territory (other than Ireland); 2. where the dividend is paid to a company resident in a Relevant Territory (other than Ireland) which is not controlled, whether directly or indirectly by persons resident in Ireland; 3. where the dividend is paid to a company which is not resident in Ireland and is under the control, directly or indirectly, of persons resident in a Relevant Territory (other than Ireland) and is not under the control, whether directly or indirectly, of persons who are not so resident; 4. where the dividend is paid to a company which is not resident in Ireland, the principal class of the shares of which is listed and regularly traded on a recognised stock exchange in a Relevant Territory or where the recipient of the dividend is a 75 per cent subsidiary of such a company; and 5. in addition, an exemption may be available under the terms of an applicable double tax treaty. Certain documentation requirements must be fulfilled prior to the exemption being available. Debt funding Generally speaking, a deduction will be available for interest paid to third party lenders in respect of loans to acquire shareholdings in subsidiary companies. While Ireland imposes withholding tax on interest at the rate of 20 per cent, an exemption is available from withholding tax on interest payments made where the recipient of the interest is a company resident in a Relevant Territory (other than Ireland) and that Relevant Territory applies a tax on interest that generally applies to interest received from sources outside that territory. Alternatively, exemption may be available under the terms of an applicable double tax treaty. Exiting from Ireland In some cases, it is possible to remove a holding company from the Irish tax regime by moving its management and control and therefore its tax residency elsewhere (usually described as a "migration"). A deemed capital gains tax charge can apply on the change of tax residence of an Irish holding company. However, exemptions from this charge are available. It is important to consider the scope of these exemption provisions on the establishment of the company in order to ensure that they will be available if required. Where it is not possible to migrate a company (depending on the particular circumstances, a company may still be Irish resident by virtue of its Irish incorporation) it should be possible (due to the exemption from capital gains tax on a disposal of shares in a subsidiary company) to simply transfer the shares in subsidiary companies to a new holding company and liquidate the Irish company. The liquidation of a company in these circumstances should not usually give rise to adverse Irish tax consequences.

4 Page 4 Other considerations Other favourable aspects of Ireland's tax system which allow investment to be made in a tax efficient manner where an Irish holding company is used, include the following: 1. Ireland has only limited thin capitalisation rules; 2. Ireland has transfer pricing rules. However, these only apply to transactions undertaken by a trading company and should therefore not be relevant to a holding company's activities which are generally passive in nature; 3. Ireland does not have controlled foreign corporation (CFC) rules; and 4. Ireland does not impose capital duty on share issuances. Although a charge to stamp duty arises on the transfer of shares in an Irish company, full relief is available where the transferor company and the transferee are members of the same group. Tax Treaty access As stated above, Ireland has signed double tax treaties with 70 countries, of which 64 are in effect. The number of Ireland's tax treaties is expanding rapidly with further treaties being added on a yearly basis. We have included a list of Ireland's double tax treaties at Appendix 1 along with the reduced withholding tax rates that are available on dividend payments to Irish companies under those treaties. Alternatively, you may contact one of the Walkers team detailed overleaf for the most up to date list. The existence of a tax treaty means that the Irish holding company can often avail of reduced or zero withholding or other foreign taxes. Conclusion The Irish holding company regime compares favourably against other popular holding company regimes. While an Irish holding company will not be the most suitable type of holding company in every case, where an acquisition of trading companies is being considered, consideration should be given to the use of an Irish holding company as the acquisition vehicle. Walkers' capabilities Walkers have an office in Dublin, Ireland practicing Irish law which comprises a market leading Irish Tax Group and other legal professionals. Many clients find the combination of legal and tax services which Walkers provide allows for seamless transaction management and is both convenient and cost effective. Dated: December 2013

5 Page 5 Appendix 1 Table of dividend withholding tax rates available under Irish tax treaties Country Date of Effect % WHT Rate Albania /10 Armenia /5/15 Australia Austria /10 Bahrain Belarus /10 Belgium /15 Bosnia Herzegovina Not yet in effect 0 Bulgaria /5/10 Canada /15 Chile /15 China /10 Croatia /5/10 Cyprus Czech Republic /5/15 Denmark /15 Egypt Not yet in effect 5/10 Estonia /5/15 Finland /15 France /10/15 Georgia /5/10 Germany /5/15 Greece /5/15

6 Page 6 Country Date of Effect % WHT Rate Hong Kong Hungary /5/15 Iceland /15 India Israel Italy /15 Japan /15 Korea, Republic of /15 Kuwait Not yet in effect 0 Latvia /5/15 Lithuania /5/15 Luxembourg /5/15 Macedonia /5/10 Malaysia Malta / limited to tax on profit Mexico /10 Moldova /10 Montenegro /5/10 Morocco /10 Netherlands /15 New Zealand Norway /5/15 Pakistan Panama

7 Page 7 Country Date of Effect % WHT Rate Poland /15 Portugal /15 Qatar Not yet in effect 0 Romania /3 Russia Saudi Arabia /5 Serbia, Republic of /10 Singapore Slovak Republic /10 Slovenia /5/15 South Africa /10 Spain /15 Sweden /5/15 Switzerland /5/10/15 Thailand Not yet in effect 10 Turkey /10/15 Ukraine Not yet in effect 5/15 United Arab Emirates United Kingdom /5/15 United States /15 Uzbekistan /10 Vietnam /10 Zambia Negotiations for new treaties with Azerbaijan, Jordan and Tunisia are at various stages.

8 Page 8 NOTES 1. This table quotes the withholding tax rates available under the Irish treaties and the Parent Subsidiary Directive (where applicable) only. Lower rates may be available under the domestic law of jurisdiction of residence of the paying company. 2. The lower rates are generally available when minimum shareholding requirements are satisfied either under the applicable treaty or in the case of subsidiaries resident in EU Member States the Parent Subsidiary Directive. 3. These rates may not be available where the Irish recipient has a permanent establishment in the jurisdiction of the paying company. 4. Anti-treaty shopping provisions and beneficial ownership requirements must be considered on a case by case basis. For further information please refer to your usual contact or: Dublin - Petrina Smyth, Partner petrina.smyth@walkersglobal.com Dublin Olivia Long, Of Counsel olivia.long@walkersglobal.com The information contained in this memorandum is necessarily brief and general in nature and does not constitute legal or taxation advice. Appropriate legal or other professional advice should be sought for any specific matter.