For many years Ireland has led the way in Europe with offering innovative financial services and products for investors both within and outside the European Union. This strategy has been very successful for European, Asian and North American investors. Recent Irish Revenue clarifications, legislation and tax treaties as well as the regulatory environment are now giving Ireland an advantage over other EU jurisdictions for Middle East investors.
Examples of transactions or structures that have been implemented successfully in Ireland include:
Tax Efficient Holding Company Structures
Irish private holding companies are a tax efficient means of holding shares in subsidiary companies. These companies benefit from a number of tax exemptions and a flexible company law regime. Many private companies and family holding vehicles use Ireland as their European holding or intermediate holding company regime.
NYSE/NASDAQ listed companies (Covidien, Ingersoll Rand, Accenture, Willis, Seagate, Warner Chilcott) and London Stock Exchange listed companies (Experian, Shire, UBM, WPP) have undergone corporate migrations and are now domiciled in Ireland. James Hardie Industries (a NYSE listed company) moved from the Netherlands to Ireland.
Irish vehicles are commonly used in cross border leasing transactions. Half of the world’s fleet of leased aircraft are managed from Ireland.
Special purpose vehicles (SPVs) for structured finance transactions, including financings for international groups, repackagings, synthetic and cash flow CDOs, asset-backed commercial paper programmes, securitisations, LPN structures and a host of other financing transactions are common place in Ireland.
Family trust arrangements can be structured and managed in Ireland which can interact with Irish holding companies and finance companies to achieve the benefits generated by companies and deliver them to family arrangements.
There is a current international trend away from investing in so-called tax havens. Ireland is a member of the EU and also a founder member of the OECD and is not a tax haven jurisdiction. This makes it more attractive in the current environment, but careful tax planning is required at an early stage of any transaction. Some investors take comfort in the fact that Ireland has a developed corporate legal system and tax structure.
Other advantages of setting up structures in Ireland include:
- Ireland has an extensive list of double taxation treaties. Ireland has signed treaties with Bahrain, Kuwait, Saudi Arabia, United Arab Emirates, Morocco, Egypt and Qatar.
- In 2010, the Irish government introduced legislation for the tax treatment of Shari’a-compliant leasing and finance arrangements, giving greater access than ever before to Ireland’s favourable tax and regulatory environment for investors in and promoters of Shari’a-compliant finance.
- The Irish Revenue have issued guidance on the Irish tax treatment of Shari’a law compliant funds, ijarah arrangements, takaful (insurance) and retakaful (reinsurance) arrangements and family (life) takaful arrangements. Broadly, these are given the beneficial tax treatment that is given to their western equivalents.
- Ireland is a member of the EU and one of only two English-speaking jurisdictions in the euro-zone.
- Like the UK and the US, Ireland is a common law jurisdiction and its legal concepts will be recognised by most investors.
- Ireland is an “on-shore” jurisdiction and top class professional and administration services are available locally.
- The Central Bank of Ireland has approved Shari’a complaint funds established as UCITS funds and non UCITS funds.
- Ireland as a jurisdiction requires the minimum of changes to the operation of an existing company on migrating while at the same time offering maximum flexibility in terms of company law, regulation and tax.
- Since its establishment in 1987, Ireland’s International Financial Services Centre (“IFSC”) has developed into a significant global financial centre. A wide range of financial services companies are based there engaging in activities ranging from banking and mutual fund management to corporate treasury, equipment and aircraft leasing and insurance services. The IFSC is serviced by an extensive network of major banks, brokerage firms and professional advisers.
- Ireland is in an optimum time zone, which ensures global service coverage.
- The Irish government has a strong commitment to maintaining Ireland as a centre of business excellence.
- Ireland has an advanced telecommunications infrastructure, with state-of-the-art optical networks and international connectivity.
Shari’a Compliant Structures
For a number of years, the Irish regulatory authorities have approved Shari’a compliant funds that utilise Irish fund structures. More recently, legislation and Irish Revenue Commissioners provide guidance on ijarah arrangements, takaful (insurance) and retakaful (reinsurance) arrangements and family (life) takaful arrangements. Broadly, ijarah arrangements are treated in the same way as an operating lease, finance lease or hire purchase agreement depending on their individual features. This means that all of the benefit of Ireland’s favourable leasing regime will apply to these structures. For example, an Irish leasing company will be taxed on its net profit, computed in accordance with normal accounting principles and can deduct its cost of acquisition of the asset so that its profit can be maximised. Payments under the leases by the Irish company are not subject to withholding tax.
Takaful (insurance) and retakaful (reinsurance) arrangements are treated as insurance and reinsurance respectively for Irish tax purposes. Under Ireland’s “gross roll-up regime” insurance companies are taxed only on their profits (and not on policyholder profits) at the rate of 12.5%. Deductions are available for technical reserves and for other normal deductible items. No tax arises for non-Irish resident policy holders. Accordingly, it is possible to set up efficient takaful, retakaful and family (life) takaful arrangements in Ireland in accordance with Shari’a principles.
Shari’a Compliant Finance Arrangements
A specifc part of the Irish tax code addresses the tax treatment of certain Shari’a compliant financial transactions.
- give greater certainty to participators, including finance undertakings and borrowers, as to the tax consequences of a range of Islamic finance transactions;
- allow companies to utilise familiar Islamic finance structures in Ireland whilst taking advantage of Ireland’s favourable and straightforward tax regime; and
- create an improved market environment for Islamic finance products within the Irish financial services industry.
This legislation illustrates the continued intention of the Irish government to enhance Ireland’s attractiveness as a centre for international investment, particularly from the Middle East, and to build upon the country’s established reputation as a European and international financial hub.
In particular there are now specific provisions for the tax treatment of Islamic investment transactions including sukuk. An Irish resident company can issue sukuk in a form compliant with Shari’a principles in relation to underlying assets. For Irish tax purposes it will be treated as having been issued by the Irish company. This means that the Irish company will, if properly structured, obtain a deduction for the return paid to the holder of the sukuk. Payments to the holder of the sukuk will be exempt from Irish withholding tax if one of the usual exemptions applies: quoted Eurobond; EU/Irish treaty residents etc. The result will usually be that using Ireland for sukuk issuances will not add to the tax costs. (See paragraph on Financing SPVs below)
The provisions confirm that returns on bank deposits are treated for Irish tax purposes as if they were a payment of interest paid on a deposit of money with a bank. This means that the bank will be tax-neutral in most cases and any non-Irish depositor will receive the return free of Irish tax. This allows for the efficient structuring of Murabaha.
Finally, there are specific rules, setting out the treatment in respect of “credit transactions.” This term is defined widely and encompasses arrangements where a finance company or financial institution (a finance undertaking) acquires an asset for the purpose of disposing of it at excess consideration. It also covers a joint acquisition of assets by an operator and the finance undertaking with the operator having exclusive use and entitlement to profit or gain from the asset where the excess consideration paid is equivalent to interest and the full legal and beneficial interest in the asset will ultimately pass to the operator. The provisions applying to credit transactions and credit returns are intended to apply to murabaha and musharaka transactions. Credit transactions are to be treated as loans for Irish tax purposes and the credit return is treated as interest. The legislation clarifies that the expenditure by a finance undertaking on an asset shall not qualify for capital allowances but that the investor is entitled to allowances. The provisions also provide guidance on various elements of the tax treatment of credit transactions where previously there was relative uncertainty. The effect is to allow Irish finance companies to participate in murabaha, musharaka and ijara without incurring additional tax cost in Ireland.
Effectively, the full range of Irish financing and securitisation company structures are fully available for these transactions. (See paragraph on Financing SPVs below).
New Double Taxation Treaties with Ireland
Ireland has signed double taxation treaties with 69 countries that produce over 90% of the world’s GDP, 64 of these treaties are in effect. A list of the current “relevant territories” is set out below.
Most of the Irish domestic exemptions (e.g. from interest and dividend withholding tax) that flow from these double tax treaties will apply as soon as the agreements are signed and one does not need to wait for ratification to obtain the Irish benefits of the treaties. This is certainly advantageous as it can often take time for a treaty to be ratified after it has been signed. Accordingly once these countries sign, they will immediately become “relevant territories” and, for example, interest and dividends can be paid to residents of those countries without withholding tax. Ireland signed a double taxation treaty with Bahrain in 2009, Morocco in June 2010, the United Arab Emirates in July 2010, Kuwait in November 2010, Saudi Arabia in October 2011, Egypt in April 2012 and Qatar in June 2012. New agreements with Jordan are currently being negotiated.
Establishing a Holding Company in Ireland
The Irish holding company regime has a number of features that make Ireland an attractive location for Middle East investors. In addition to the many advantages to investing in Ireland outlined above, the main taxation benefits of establishing a holding company are:
Profits from an Irish company are usually paid out by dividend. No withholding applies to dividends paid to residents of “relevant territories” if the correct forms are filed.
Non-Irish dividends received by an Irish company are generally subject to Irish tax at the rate of 25% for passive-derived income and 12.5% for profits of trading operations (i.e. active businesses). There is a flexible credit system which, enables underlying tax within the subsidiaries to be accessed efficiently and pooled. In the vast majority of cases this eliminates incremental tax in Ireland. Trading profits are traced though tiers of companies, so that when a dividend is paid out of trading profits of a lower tier subsidiary ultimately to its Irish parent, the 12.5% rate can apply. Where an Irish company has a shareholding of 5% or less in the dividend paying company, there is no requirement that the dividend be paid out of trading profits as the 12.5% rate will always apply to such “portfolio” dividends.
Under the EU Parent-Subsidiary Directive, an Irish company is entitled to receive dividends from a company resident in another EU Member State without withholding tax if a minimum 5% holding and, a maximum holding period of 12 months is satisfied. Local rules sometimes improve this position.
Capital Gains Tax (“CGT”) Exemption on Share Disposals
Ireland has a comprehensive exemption from CGT on the disposal of shareholdings. Broadly, the conditions for the exemption are:
- the Irish company must have continuously held at least 5% of the share capital of the company being disposed of for at least 12 months within the two years prior to the disposal (which facilitates selling shares in stages);
- at the time of sale, the company whose shares are being sold must be resident in a relevant territory (see list below) or in Ireland; and
- at the time of sale, the company whose shares are being sold must either be (i) a trading company or (ii) part of a trading group with its parent (i.e. where more than 50% of the group’s consolidated business consists of active businesses and ignoring intra-group transactions).
Controlled Foreign Company (“CFC”) and Transfer Pricing
Ireland does not have CFC legislation so an Irish holding company is not usually subjected to tax on its earnings from foreign subsidiaries until a dividend is paid to Ireland.
Ireland has always operated limited transfer pricing rules which were rarely invoked in practice. In 2010 another form of transfer pricing was introduced which only applies for active businesses in Ireland taxed at 12.5%. The provisions largely implement the OECD Transfer Pricing Guidelines and apply only to connected party transactions. Ireland does not have detailed thin capitalisation rules and there is no specific debt: equity ratio required of Irish resident companies.
The sale of shares in Irish incorporated companies gives rise to stamp duty at the rate of 1%. There are reliefs for transfers within a 90% group provided, inter alia, that the buyer or seller does not leave the group within two years from the date of transfer and for reconstructions into EU incorporated companies. Other strategies for eliminating stamp duty exist. There is no capital duty on share issues.
Establishing an Irish Financing or Leasing SPV
The predominant reasons for Ireland’s popularity as an SPV location are its favourable tax regime, the fact that it is an “on-shore” jurisdiction and the professional and administration services that are available locally.
Entity-level tax – Section 110
Section 110 of the Irish Taxes Consolidation Act provides that the taxable profits of a company (a “Section 110 Company”) are computed broadly on an accruals basis. As profit participating debt is usually used to extract all material profit, the taxable profit of a Section 110 company is usually small. This small profit is taxed at 25%.
The criteria to qualify as a Section 110 Company include:
- that it is an Irish resident company that carries on in Ireland the business of holding or managing “qualifying assets” and no other business;
- that a “qualifying asset” consists of a financial asset, commodities or plant and machinery or any interest (including through a partnership) in such an asset. A “financial asset” includes shares, bonds, other securities, futures, options, swaps, derivatives and similar instruments, invoices and all types of receivables, obligations evidencing debt (including loans and deposits), leases and loan and lease portfolios, hire purchase contracts, acceptance credits and all other documents of title relating to the movement of goods, bills of exchange, commercial paper, promissory notes and all other kinds of negotiable or transferable instruments, carbon effects, forest carbon credits and contracts for insurance and reinsurance; and
- that the minimum market value of qualifying assets acquired or held on the day the SPV first acquired qualifying assets must be greater than ¤10 million. This is a once off test for the SPV and it is a cumulative threshold for all qualifying assets held or acquired by the SPV on that day.
A Section 110 Company established in Ireland can lease «plant and machinery» which enhances Ireland’s attractiveness as a leasing platform location for big ticket leasing activities including aviation and ship leasing. This also gives rise to the opportunity implement Shari’a compliant ijarah leasing activities in Ireland, particularly with respect of EU and US assets.
Numerous exemptions from Irish interest withholding tax exist. These include interest paid on listed debt or commercial paper, interest paid to persons resident and subject to tax in a “relevant territory”, and interest paid to another Section 110 company (which facilitates multi-company structures). No prior clearance is needed to pay the interest gross in most of those cases.
The issue or transfer of debt issued by Section 110 Companies is exempt where the money raised by such debt is used for the purposes of the Section 110 Company’s business. Stamp duty can apply on the acquisition of Irish assets, but should not be payable on the transfer of non-Irish assets and a wide variety of exemptions exist for financial transactions.
Generally Section 110 companies are treated as carrying on an economic activity/being an entrepreneur for VAT purposes. On that basis, services supplied to them from outside Ireland are usually treated as having an Irish place of supply. This means that the liability to VAT (and associated recovery) are governed by Irish rules, including the availability of an exemption for the management of a Section 110 company. Also, whilst a Section 110 company is not normally entitled to VAT recovery (on the basis that it is carrying onexempt financial activities) VAT recovery will arise to the extent that it makes supplies outside the EU, including disposing of non-EU situated financial assets as part of an economic activity.
Ireland has a very well developed infrastructure and legal system in relation to family trusts. Broadly, it inherited UK trust law and judicial decisions which provide a significant level of protection for beneficiaries. A large number of professional trustee service providers exist that can be utilised to manage Irish trusts. There are significant tax and planning benefits with using an Irish trust. For example, where the settlor and beneficiaries are not resident, ordinarily resident or domiciled in Ireland and the trust assets are not Irish situate property, an Irish trust administered by trust professionals would not give rise in most cases to Irish tax. In addition, we have developed structures that enable Irish holding companies and Section 110 companies to be held in such trusts without causing Irish tax to arise at the trust level. This enables the family trust to effectively access all the benefits of an Irish holding company and financing company structure while also availing of all of the benefits of an Irish trust. Irish trusts are an effective succession planning tool and enable assets to be transferred between family members or on death.
Arthur Cox Listing Services Limited have been involved in the listing if Islamic Finance Securities since 2006 and have valuable knowledge and expertise in listing these products.
Arthur Cox was responsible for listing the first Islamic Finance Programme on the ISE in 2007, the Oasis Certificate Programme arranged by Citibank. The Irish Stock Exchange has placed itself as the leading exchange for listing specialist debt securities in Europe including Islamic Financing, listing its first Islamic transaction in 2005.
Special Assignee Relief Programme
Finance Act 2012 introduced the Special Assignee Relief Programme (SARP) which applies (subject to certain conditions) to employees of companies incorporated and tax resident in a country with which Ireland has a double tax treaty or in a country with which Ireland has a tax information exchange agreement, who having spent a minimum of 12 months working for that company outside Ireland, then arrive and become resident in Ireland between 2012 and 2014. The relief operates to exempt from income tax 30% of all income between €75,000 and €500,000 from that employment, including bonuses, benefits-in-kind, employer-provided loans, non-exempt termination payment, restrictive covenants, share option gains and share awards.
In addition to the principal income tax exemption, employees in the SARP will be entitled to claim a further annual whole income tax deduction of the reasonable costs of a return trip by his/her spouse or civil partner to the home country or country of nationality and the cost of fees for primary or second level education of that participant’s children, subject to certain conditions.
The SARP is a very welcome addition to the Irish tax code, and provides a further benefit to Middle Eastern investors seeking to establish a company here and to encourage highly skilled executives from within their organisations to oversee these processes.
Immigrant Investors VISA Programme
The Irish Government recently introduced a new initiative aimed at facilitating non-EEA migrant investors who, in return for permission to reside in Ireland, are prepared to invest here for the purpose of saving or creating jobs.
Approved participants in the Investor Programme and their immediate family members may enter Ireland and remain here for a defined period (ordinarily five years), through the granting of multi-entry visas. The level and duration of financial commitment required by investors will be dependent on the nature of the investment but will generally range from €400,000 for endowment related investments to €2,000,000 in a new low bearing Government bond to be devised by the National Treasury Management Agency in conjunction with the Immigration Authorities. More suited to Middle Eastern investors may be the opportunity of investing in business entities where jobs are being created or saved.
Ireland has developed as a very favourable location for investors across the world to use as a base for holding and managing European, Asian and North American assets and investments. Recent developments including the conclusion of double tax treaties with a number of Middle East countries, the clarification from Revenue in relation to Shari’a compliant structures, Ireland’s holding company regime and Ireland’s finance company regime provide attractive and efficient solutions to Middle Eastern investors who wish to use Ireland as a base to invest in Europe or North America or as a means of managing their assets or risks. The Irish legal and financial services market is sophisticated and adapts to the particular needs of investors. In addition, the regulatory authorities and Revenue authorities are approachable and will in most cases give comfort or feedback in relation to particular structures as the need arises.Download PDF