Irish companies can be used for a variety of trading and licensing activities. Ireland is a member of the EU and has adopted the Euro but it remains a low tax jurisdiction relative to the majority of other European countries. For these reasons Ireland remains a popular location for companies involved in international trade.
Basis of Taxation
As from 1 October 1999, all Irish incorporated companies are resident in Ireland for tax purposes unless one of the limited exemptions is applicable. The taxation of Irish resident companies is set out below:
Irish companies are taxable at the following rates:
12.5% Irish Trading activity; dividends from certain overseas trading subsidiaries
25% Other income
20% Capital gains
In addition there is a 0% rate of tax for start-up companies in Ireland, available for the first 3 years of trading. The rate is available where the annual tax liability does not exceed Ђ40,000. Given the 12.5% ordinary rate of tax, annual profits of up to Ђ320,000 can be earned free of tax for three years.
In order to benefit from the 0% or 12.5% rates there needs to be real substance in Ireland. It is possible to get an advance ruling on the applicability of the 0% / 12.5% tax rates.
Ireland has a credit system for double tax relief, meaning that foreign dividends are not excepted from Irish tax. However, any foreign tax suffered on income or gains can be set against the Irish tax payable. With regard to dividend income, relief may also be available in respect of underlying tax, i.e. the foreign tax suffered on the profits out of which the dividends are paid. Whether or not relief for underlying tax is available will depend on the size of the shareholding and the relevant double tax treaty. It is expected that Ireland will move towards a full exemption system in the near future.
Capital gains of an Irish company are taxable at 20%. However, there is a participation exemption in relation to gains on qualifying investments. The conditions are as follows:
(a) 5% or greater shareholding
(b) Subsidiary resident in an EU or treaty jurisdiction
(c) Shareholding held for at least 12 months
(d) the subsidiary must be a trading company or the Irish company and its group on a whole must be a trading group.
Withholding tax on dividends
Withholding tax must be deducted from dividend payments at the standard rate of income tax, which is currently 20%. Dividend payments are exempt from withholding tax if they are paid to individuals or companies resident in EU or tax treaty countries.
In addition dividends can also be paid gross to companies in non-EU or non-tax treaty jurisdictions if the company in question is ultimately controlled by individuals who are resident in an EU or tax treaty jurisdiction or if the company is controlled by a company/companies traded on a relevant stock exchange.
A capital distribution on the liquidation of an Irish company is not subject to Irish withholding tax. However, it is important to note that it is necessary for the company to be formally liquidated.
Withholding tax on royalties
Royalty payments are not subject to Irish withholding tax, (with the exception of patent royalties which can subject to a 20% withholding tax, although there is an exemption where the recipient is resident an en EU or treaty state and subject to tax on the income). As a result, use of an Irish resident company is highly effective for licensing trademarks, copyrights and film rights as part of a royalty structure. Double Taxation Treaties can be used to minimise inward withholding taxes and royalties can be paid to the owner of the rights, in any jurisdiction, with no Irish withholding tax deducted.
The annual tax return of an Irish resident company must be submitted within 9 months of the end of the accounting period.
Corporation tax is payable on a self-assessment basis in instalments.
The relatively low Irish corporation tax rates will continue to create many opportunities for the use of Irish companies. However, advice should always be sought before using an Irish company in any structure as consideration needs to be given to the withholding tax position on dividends and also to other factors such as whether substance is required, which may be the case in order to benefit from the lower trading income tax rates, and also other matters such as Stamp Duty and Capital Duty.