FEATURE | Tax
“IT IS neceSSAry
To UnderSTAnd
THe foreIgn TAx
ISSUeS And THeIr
InTerAcTIon WITH THe
IrISH SySTeM.”
seek to restrict interest deductibility should be considered, particularly if the intention is to maximise the level of debt in the foreign subsidiary so as to minimise the charge to corporation tax.
EXIT STRATEGIES
Capital gains tax exemption on sale of shares in subsidiaries
When developing a tax structure for a group with international operations, it is important that some tax free exit mechanisms are in place in the event of a disposal of elements of the international group. There is an exemption from capital gains
tax on gains realised on the disposal of certain shares held by an Irish holding company. The Irish parent must hold (directly or indirectly) at least a 5 per cent shareholding (including the right to 5 per cent of the profits and assets on a winding up) of the subsidiary company for a 12 month period. At the time of disposal, the subsidiary must be a trading company or, alternatively, the test may be satisfied on a group basis where the business of certain members of the group consist wholly or mainly of the carrying on of a trade or trades. The subsidiary must also be resident in the EU (including Ireland) or a DTA jurisdiction. If the subsidiary is resident in another territory then alternative holding structures can be implemented.
INDIRECT TAX CONSIDERATIONS
Initially, a foreign operation may be loss-making, so a corporation tax liability may not arise immediately. However, VAT and customs duty issues may result in cash tax liabilities from the outset, so their importance cannot be ignored.
TRANSFER OF EMPLOYEES
In any foreign start up, the Irish head office is likely to transfer highly skilled employees abroad to supervise and control the investment in the target location and manage local
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employees. The residence position of the individual and the charge to taxation on employment income is dependent on the duration of the international assignment, i.e. temporary or long-term. It is important that the implications of continuing to be paid by the Irish employer or transferring to the payroll of the foreign entity are understood. The tax implications of providing accommodation in the new location and paying sums in respect of travel and subsistence must also be addressed.
MISCELLANEOUS TAXES
Taxes on capital
Some foreign jurisdictions impose net-worth taxes based upon business net worth at the end of the financial year. Also, many municipalities levy annual real estate taxes on commercial and private property for which a corporation tax deduction may be available. These taxes can add to the overall effective tax rate payable in any jurisdiction.
Capital duty and stamp duty
Unlike Ireland, many countries impose taxes on contributions of capital, whether in cash or kind. Transfer of shares, bonds and other securities as well as immovable property, may give rise to stamp duty or other transfer taxes. However, in most cases the rates of tax are much lower than similar taxes imposed in Ireland.
Local practices
Many developing countries operate local practices that may not be transparent to foreign companies at the outset. Working in co-operation with local distributors or joint venture partners may be a way of ensuring full compliance with local laws. In practice, a higher standard of compliance with all relevant laws and regulations may be expected of foreign
companies than applies to domestic businesses and this poses challenges for Irish companies commencing foreign operations.
ASSISTANCE FROM GOVERNMENTAL AGENCIES: ENTERPRISE IRELAND
Enterprise Ireland is the government agency responsible for the development and promotion of the indigenous business sector. Its mission is to accelerate the development of world-class Irish companies to achieve strong positions in global markets, resulting in increased national and regional prosperity. Through its extensive network of Irish and international offices, Enterprise Ireland works with various clients to assist them to compete and to grow. Any company seeking to expand abroad should contact Enterprise Ireland and request their assistance. Its experienced business personnel have a wide network of in-market contacts and access to up-to-date market information. Many Irish companies openly acknowledge that the doors that Enterprise Ireland opened for them through their contact base accounted for the initial success of their businesses in their new market. Companies that wish to expand their business to international markets should thread carefully and seek appropriate tax advice in advance of setting up their business operations. The criteria outlined above should provide some guidance in developing a tax structure but it is necessary to understand the foreign tax issues and their interaction with the Irish system in the context of the specific fact pattern relevant to each client. It is also important that groups continually monitor the tax regime of the countries they operate within after they set up their tax structure as annual legislative amendments may require groups to make changes in due course.
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