The IFSC's tax advantage

Prior to the birth of Dublin's International Financial Services Centre (IFSC) in 1987, international banks, insurance companies and fund management companies would not have considered entering the Irish market. Now, 10 years later, almost 300 financial services companies are certified to operate in the centre.

The IFSC has created huge amounts of work for the country's law firms. However, change looms on the horizon for the centre. One of the most important selling points of the IFSC is that companies pay a preferential corporation tax rate of just 10 per cent on income from international financial services activities. In addition, IFSC companies are entitled to double rent allowances, no municipal taxes and no withholding of tax on interest or dividend payments.

The preferential tax rate is only guaranteed until December 2005 for all non-manufacturing companies. This creates the possibility that companies, having availed themselves of the benevolent tax regime, will abandon the IFSC. Such an event would be very bad news for the Irish legal profession, particularly the firms which have captured major business from the centre.

"The changes of 2005 can be overplayed," says John Larkin, a partner in William Fry's commercial department. "A favourable tax regime is not the sole criterion. Draconian rates would need to be be introduced to cause a mass exodus. It is an important factor if a company's workforce is based in Dublin and it cannot afford to overlook this."

Ambrose Loughlin, a partner at McCann Fitzgerald with responsibility for IFSC affairs, agrees. "Tax is not the only issue. Ireland also has quality telecommunications, quality accommodation and well-qualified staff. Companies could set up in the Cayman Islands if tax was the only issue," he says.

Many IFSC companies are also paying tax in their own jurisdiction. The Irish tax rate is of less importance to companies in these circumstances. However, the Irish government appears committed to maintaining a low corporation tax rate of about 12.5 per cent.

"The government is taking a long-term view of this tax issue, which is rather unusual," says Loughlin. "It is looking at projects which may be set up in 2002 and 2003 and is considering what rate it needs to establish for these projects to go ahead."

Although Ireland is facing a general election on 6 June and possibly a new government, this will not jeopardise the introduction of a favourable rate in 2005. Even parties currently in opposition have proposed a rate roughly the same as the current preferential rate.

"Whatever the composition of the government it is not going to ignore the needs of the IFSC," says David Dillon, managing partner of Dillon Eustace.

"The IFSC is one of Ireland's success stories," says Dillon. "All the political partners have been involved in it at some stage and when it suits them they like to share the acclaim. No party has expressed negative feelings or apathy about the centre."

If the government does introduce a rate of 10 per cent, or a little higher, there is a risk that other European countries could object on the grounds that it is still a concessionary rate. Luxembourg is Ireland's main competitor in the funds industry and Ireland's low tax rate has already forced Luxembourg to lower its tax rates last year.

Aside from maintaining a low corporation tax rate, other options open to the government include applying to the European Commission for an extension to the current regime or, following the Dutch model, levying a high rate of tax but offering allowances. The commission is unlikely to grant an extension and the Dutch model is less desirable.

"The low rate acts as a headline for companies coming into Ireland and it also makes it easier for us when talking to clients who may be interested in setting up an Irish operation," says Loughlin.

Although the legal profession believes 2005 will pass almost unnoticed, they are pleased that the government has promised to take control of the rate. Resolution is considered the best scenario with a fixed rate of about 12.5 per cent.

"We do a lot of business with the IFSC but we were never of the view that 2005 was a critical date or that we would have to close down our financial services practice and look elsewhere," says Dillon. "It [the government's action] sends out the right message to companies in Ireland. Politicians on both sides are taking a sensible approach and are supportive of the business community."

Law firms are getting some requests from clients for advice on planning for any changes in the tax regime.

"We are involved in advising clients as to how things are evolving," says Larkin. "There will be ongoing compliance work and regulatory advice but 2005 will not present a gravy train for lawyers."