Ireland: market expansion
5 November 2007
The 'Ireland Inc' concept was developed in the late 1980s to indicate the social partners in Ireland coming together to develop strategies to advance the country economically.
There were many partners in this process, including government, industry, professional advisers, revenue commissioners and Enterprise Ireland. The idea was to develop a coherent set of policies and approaches which would attract economic activity to Ireland.
Pharmaceutical companies, software and other technology companies, funds and fund administration, banking, securitisation and other activities moved to Ireland under this approach.
Historically, the financial services activities carried out in Ireland were back-office functions. In recent years, however, the results of Ireland Inc's long-term policy approach is starting to move to the next level of development, from back-office functions to front-office activities.
Prior to 2004, Ireland was an unattractive location for a holding company. Successive finance acts in the interim have overturned this position, making Ireland an attractive place both to locate intermediate group holding companies and holding companies of listed groups.
The elements of the Irish holding company exemption are:
- A reasonably broad exemption from tax on capital gains for disposals of shares (or interests in shares where the holding is 5 per cent or more of the share capital of the company);
- A flexible dividend credit pooling system with the ability to access credit for underlying taxes in a flexible manner and at all lower tiers in the structure; and
- The abolition of capital duty on share issues. A wide variety of exemptions for outbound withholding tax, including payments to residents of the EU or Irish tax treaty countries and an American Depository Receipts (ADR) exemption.
One downside for Ireland as a holding company location is the continuing existence of stamp duty on transfers of Irish shares at the rate of 1 per cent. This is subject to an exemption for transactions in ADRs (ie many Irish companies listed in the US).
During the latter part of 2006, Experian, a global information services company, was demerged from the GUS Group and established a Jersey incorporated, Irish tax-resident holding company as the listed entity.
As Experian had operations around the world with no obvious 'centre of gravity', there is no 'natural' choice in which to locate the top listed company. Yet Ireland was chosen from various jurisdictions.
Since Experian is incorporated in Jersey, there is no Irish stamp duty on share trades. A number of other UK and US listed companies are considering either moving their tax residence to Ireland or reincorporating in Ireland.
For many years Ireland has been a location for investment funds and their administrative functions. Since the changes to the Finance Act 2003, Ireland seems to have become the primary location for EU-based securitisation vehicles.
In recent years investment managers for funds and collateral/portfolio managers or servicer's for securitisation vehicles have begun locating their businesses in Ireland. The type of activity being carried out in Ireland has developed from the back-office administrative activities to front-office decision-taking activities. Managers that have set up front-office operations in Ireland include Guggenheim Partners, Fideuram Asset Management, Mediolanum Asset Management and Pioneer Investments.
Many investment vehicles can be structured as either a fund or a securitisation vehicle and the choice is governed by company law, regulatory and tax considerations. In addition, the crossover between funds and securitisation vehicles has seen funds investing in securitisation vehicles and vice versa. Recent tax changes have eliminated withholding tax on cashflows between Irish funds and Irish securitisation vehicles so that structures using both funds and securitisation vehicles are more common.
Banks and insurance companies
In recent years, a large number of international banks and insurance companies have located in Ireland. An early example was Depfa Bank. More recent examples include the establishment of Wachovia Bank International as the regulated bank of the Wachovia Group in Ireland. Merrill Lynch has established an ##continued Irish bank to carry out its banking activities outside the US.
The exciting point from an Irish perspective is the location of key decision-makers in Ireland. Recent changes to the dividend credit pooling provisions and the branch and interest withholding tax credit provisions have made Ireland an efficient place to hold both branches and subsidiaries.
A number of companies have set up in Ireland to operate credit derivatives businesses. The recent turmoil in the financial markets has created opportunities as well as threats for this market. The companies have mostly been set as trading companies that avail of the 12.5 per cent rate of corporation tax.
In light of the recent changes to the UK non-domiciliary rules, Ireland remains an attractive place for high-level executives to locate to manage various front-office activities that are emerging in Ireland. A person who is tax-resident in Ireland but is not domiciled in Ireland will only be subject to:#Irish income tax on Irish source income and non-Irish source income remitted to Ireland; and#Irish capital gains tax only on Irish source gains and on non-Irish source gains remitted to Ireland.
Income tax rates have been lowered recently and the related credits and exemptions have been increased, reducing the effective tax rate on salaries. The longstanding Irish non-domiciliary rules make Ireland an efficient place for executives to locate to in order to operate and manage Irish businesses so that both the business and the executives can benefit from competitive tax rates. In addition, a flat rate of capital gains tax of 20 per cent is applied to gains of both individuals and companies. It is still possible to structure private equity management incentives to fall within the capital gains tax rules.
The attractions of Ireland include:#good infrastructure;#being located in a time zone that is friendly for the Far East, Europe and the US;#the availability of skilled personnel who are either already located in Ireland or are willing to move to Ireland from the mainstream financial centres, including London and New York; and#a corporate tax rate of 12.5 per cent on trading profits (including management fees).
Ireland is becoming more than just a back office for US and other non-European investment into Europe and for European corporates. It is now starting to move into front-office, decision-making roles.
The long-term policy strategies developed by Ireland Inc are coming to fruition and Ireland is rapidly moving up the value chain at a time when global competition is increasing.
This has been assisted by the cluster effect of a large number of financial service businesses in a single location (Dublin) which has added experience to the education levels attained by the workforce.
Both domestic financial services firms and non-Irish firms seem to be expanding their businesses and starting new front-office businesses in Ireland.
From the start, the Ireland Inc concept of various social partners coming together has been maintained and is seeing success in moving the Irish economy up the value chain of economic activity in financial services.
Fintan Clancy is a partner at Arthur Cox