12 June 2015
Ireland has long been a competitive location for international financial services companies. The recently released ‘IFS2020: a Strategy for Ireland’s Financial Services Sector 2015–2020’ sets out the Government’s vision for the future and presents a five year strategy to further develop Ireland as a global leader in this sector. Over the past 25 years, Ireland’s international financial services sector has grown spectacularly, attracting significant levels of foreign investment which has both provided business opportunities for Irish companies and made a significant contribution to employment levels. Some of the key tax advantages that promote Ireland as a location for international financial services are set out below.
The rate of corporation tax for trading activities is 12.5% with expenses generally tax deductible. While depreciation is not tax deductible, capital allowances (tax depreciation) is normally available for certain assets used for the purposes of the trade of the company. Plant and machinery is depreciated over an eight year period on a straight line basis.
Ireland’s tax regime for regulated investment funds has been long established and ensures that the fund itself is essentially exempt from Irish tax on its income and gains. Tax generally only arises for the investors to the extent they are Irish individual investors. Various domestic withholding tax and stamp duty exemptions are available for Irish investment funds. The recent addition of the Irish Collective Asset Management Vehicle (ICAV) to the investment vehicles available adds to the attractiveness of Ireland as a location for investment funds. The ICAV is of particular interest to US investors due to its ability to make ‘check-the-box’ elections for US tax purposes which results in more tax efficient returns for US investors.
Ireland’s special tax regime for securitisation vehicles has contributed to Ireland being a centre for asset backed securities activities. Where securitisation entities meet a number of criteria, they are subject to tax at 25% and their taxable profits are computed in accordance with the tax rules which apply for a trading company. Consequently, they are entitled to a tax deduction for all ‘trade’ type expenses which normally results in tax neutrality at entity level. If it were not for this regime, expenses such as interest paid would not normally be tax deductible as such companies are not generally considered as carrying on a trade. The securitisation regime also allows for the tax deductibility of profit participating interest subject to certain rules.
Ireland has a wide double tax treaty network which has doubled in recent years. With 72 signed agreements and 68 in effect, such an extensive treaty network provides scope for reducing any tax barriers which may inhibit cross-border trading and investment. One of the action points of the IFS2020 paper (see above) is to initiate negotiations for new agreements with other countries and to update existing agreements in the coming years.
Financial technology (FinTech) is a sector that has been cited in the IFS2020 paper as a key area in ensuring the continued development and operational efficiencies in the financial services sector. Ireland has a favourable research & development (R&D) tax credit which allows a 25% tax credit for companies for qualifying expenditure on R&D activities. This credit is in addition to a tax deduction (at 12.5%) for the R&D spend which gives an effective tax saving of 37.5% for qualifying expenditure. Capital allowances are also available for capital expenditure incurred on the creation and acquisition of ‘specified intangible assets’ including the acquisition of Intellectual Property (IP). The scheme provides for a ‘wear and tear’ allowance against the taxable income of the company.
In a move that is likely to enhance Ireland’s tax competitiveness in this area, the Department of Finance announced earlier this year its intention to introduce a new incentive to locate high-value IP jobs in Ireland – the Knowledge Development Box (KDB). It is understood that the KDB will provide for a preferential effective tax rate to income generated from IP where certain risks or functions are located in Ireland.
There are extensive dividend withholding tax exemptions such that in many cases, dividend withholding tax only applies to dividends paid to Irish resident individuals. In relation to withholding tax on interest payments, again, there are extensive exemptions available. One of these includes an exemption from interest withholding tax where the recipient of the interest is resident in the EU or a country that has a double tax treaty with Ireland (subject to meeting certain conditions).
Dividends received by Irish resident companies from Irish resident subsidiaries are generally not subject to Irish corporation tax. ‘Qualifying dividends’ received by Irish companies from foreign companies are subject to corporation tax at 12.5% as opposed to the normal rate of 25% applicable to foreign dividends. Qualifying dividends are dividends paid out of a foreign company's trading profits where that foreign company is tax resident in a ‘relevant territory’ or where the foreign company (or, where the company was a 75% subsidiary of another company, that other company) is quoted on one or more recognised stock exchanges in a ‘relevant territory’ or territories, including Ireland. A ‘relevant territory’ means an EU member state, a tax treaty jurisdiction, or a country that has ratified the OECD Convention on Mutual Administrative Assistance in Tax Matters. Further, where the Irish company holds 5% or more of the ordinary share capital of a foreign company, Ireland will give a tax credit for both foreign withholding taxes paid on such dividends and for underlying corporate taxes paid by the paying company in its home jurisdiction, subject to certain limitations. This credit extends to state and local taxes. In the absence of an applicable treaty allowing these credits, the tax credits may be given unilaterally by Ireland, subject to certain limitations.
The Special Assignee Relief Programme (SARP) is an employment incentive scheme for certain employees assigned to Irish-based operations. A qualifying individual can claim a 30% tax deduction on their Irish employment income over €75,000 for up to five years under the new SARP scheme.
Although Ireland has many tax incentives and advantages to offer, we are not complacent. For Ireland to fully capture the future opportunities in the international financial services sector, continued action must be taken to grow and support the sector. The IFS2020 strategy (see above) indicates the Government’s commitment to the continued expansion and growth of this sector.