Presentation Transcript

1. CHARTERED TAX CONSULTANT Olivia Waldron 28th & 29th September 2012 Module 8 International Tax Structuring and Holding Companies
2. Friday Introduction to concepts and tools of International Planning International Tax Structuring Tax Residence of Companies
3. Saturday VAT Issues on International Structuring and Holding Companies Irish tax regime for holding companies Taxation of Inbound Dividends Individual tax issues for expats Accounting for Tax Issues Company Law Issues
4. Introduction Companies doing business internationally Impact of structures on tax liability of the group Corporate Residence – concept and Irish rules Holding Companies – Irish tax regime Foreign Employees – Individual tax issues
5. Overview Aim of international tax structuring? Maximise available tax benefits Minimise tax costs in each jurisdiction Decisions with tax impact? How many companies? Where to locate? How to finance the entities? Allocation of functions, risks and assets?
6. Tax Considerations Tax rates in each jurisdiction Tax Incentives available Tax base in each jurisdiction Treaty access Anti-avoidance provisions e.g., Exit taxes, CFC Thin capitalisation etc
7. Separation of Corporate Functions Performance of activities in so far as possible in low tax jurisdictions without damaging the wider business e.g., financing structures: Consideration of home tax provisions necessary e.g., local CFC rules in home country and cash repatriation strategies EBIT 100 EBIT 100 EBIT 0 Interest Income 40 Int Inc 40 Interest expense (60) Int exp (60).. PBT 80 40 40 Tax @ 30% (24) Tax at 30% (12) Tax at 5% (2) Tax charge 24 14 ETR 30% 17.5%
8. Repatriation of Profits Requirements will depend on dividend policy of group and cash/reserve position in home country Dividend payments from foreign subsidiaries may trigger local withholding tax or additional tax in parent jurisdiction (if credits are not sufficient to cover the parent’s tax liability) Where the parent country exempts dividend receipts from additional tax - may prefer dividends as a form of repatriation of profits from a low taxed subsidiary rather than interest charges on inter-company loans which would be taxed at parent company level
9. Financing of Subsidiaries Tax Rate = 30% Tax Rate = 10% Preferable, if Co A can get tax deduction for debt, for Co A to borrow and get tax deduction at the higher rate and fund Co B through equity. Cash repatriation to be considered i.e., tax in Co A and Co B on dividends or share buyback/redemption. Co A 100% Co B
10. Holding Companies
11. Function of a Holding Company Create a corporate structure where cash can move, income can be realised, at no/minimal tax charge Achieve specific tax benefits
12. Non-Tax Reasons Business reasons: Facilitate country level consolidation of results Facilitate divisional consolidation of results Facilitate repayment of debt used to acquire sub from results of the acquired business, To align the legal structure with the management structure e.g., regional Holdco for measurement of regional HQ results Top entity in JV investments
13. Dividend Withholding Tax Planning A A I DIV: 0% WT C DIV: WT II DIV: 0% WT B B III
14. Capital Gains/Loss Planning A A I SALE: TAXABLE GAIN C II SALE: EXEMPTION B B III
15. EarningsRepatriation A A DIV DIV DIV TAX CREDIT MIXED D LOW TAXED HIGH TAXED DIV DIV C B C B
16. DeferralofEarnings A A DEFERRAL TAXATION UNTIL B REDISTRIBUTES DIV. I DIV: TAXATION A B II DIV: EXEMPTION B C III D D
17. Introduction of Leverage ACQUISITION DEBT HOLDCO TAX CONSOLIDATION / MERGER TARGET
18. Creation of a Tax Group USCo US Co IR Holdco IrCo 2 IrCo 1 IrCo 2 IrCo 2
19. Methods of Profit Repatriation
20. Methods of Profit Repatriation Dividends Interest Royalties Management Charges Share redemptions & buybacks Sale of Company to a newly debt financed Holdco
21. Tools of International Tax Planning
22. Interest To avail of tax relief at the highest possible rate on interest expense Generally some choice as between methods of allocating finance to group companies Choice will depend on: Ultimate holding company location Location of operating subsidiaries and the interaction of their tax systems Anti-avoidance legislation such as thin-capitalisation rules
23. Intellectual Property Charges Similar to the finance company example for interest, many large groups have a centralised group IP company that will acquire, manage and develop the IP for the group Typically will be located in a low tax jurisdiction and have a good treaty network to minimise withholding taxes Consider CFC rules as royalties may be considered passive income subject to CFC provisions in some cases R&D could be undertaken closer to manufacturing sites/other location such that R&D credits may be available in a higher tax jurisdiction/location with a better R&D tax credit regime
24. Interest Option 1: Bank Debt Parent Finance Co OpCo 2 OpCo 1 Opco 3 InterCo Debt
25. Interest Option 2: Parent Bank Debt Finance Co OpCo 2 OpCo 1 Opco 3 InterCo Debt
26. S247/Thin Cap Restrictions Where the overseas OpCo cannot get a tax deduction for additional debt due to thin capitalisation restriction, aim to achieve tax deduction in another jurisdiction for the debt An example would be an Irish HoldCo borrowing from the finance entity at interest and using the funds to subscribe for additional equity in the overseas jurisdiction – where those funds are used wholly & exclusively for the purposes of the trade of the overseas entity tax relief under S247 should be available in Ireland – excess interest relief can be group relieved to other Irish entities
27. Hybrid Instruments Hybrid instruments are instruments that are treated as debt in one jurisdiction and equity in another tax jurisdiction Tax opportunities can then arise as a tax deduction may be available in the jurisdiction of the payer country for interest where as the recipient country may exempt the income as a dividend falling within their participation exemption Inadvertent tax problems can arise if a hybrid arises where unintended due to features of instrument i.e., tax on income but no deduction.
28. Hybrid Instruments Instrument treated as a loan in one country and a lease in the other Domestic law differences in definitions Cross Border transaction – lessor and lessee Finance v Operation Lease Ireland taxes gross rental CA deduction US/Germany treat finance lease as loan for lessee Irish CA for lessor + German lessee gets tax depreciation on capital element of lease
29. Hybrid Entities Hybrid entities are entities that are look through from a tax perspective in one jurisdiction where as they are treated as a separate entity from another jurisdictions perspective. Tax opportunities arise as income may fall out of charge to taxation until income is actually repatriated to ultimate parent whereas a tax deduction is obtained in another jurisdiction for a charge (e.g., interest) paid into that entity
30. Hybrid Entities Transparent/Disregarded = “Look Through” Opaque/Regarded = Entity in tax law Irish partnerships = Transparent entities French partnerships = Opaque entities
31. Hybrid Entities Double Deduction for Expenses Change character from interest to dividend CFC – possible elimination
32. Hybrid Entities A UK LLP is a body corporate from a UK legal perspective and is regarded as a company from an Irish tax perspective. UK LLP legislation specifies that the LLP is regarded as transparent for UK tax purposes. UK Opco should obtain a tax deduction for the interest which is regarded as being paid to the Irish parent. Withholding tax issues and treaty access on repatriation to be considered. Irish Partner UK Partner 99% 1% UK LLP Interest UK Opco
33. Foreign Entity Classification HMRC have issued a list of various foreign entities and their classification for UK tax purposes. Can be used as a guide from an Irish perspective. Features established in case law – Dreyfus v IRC. Approach under Dreyfus: Consider characteristics under corporate and commercial law of the foreign jurisdiction, Application of tax principles to decide on type of entity for tax purposes INTM180010 – useful for Irish tax purposes
34. Foreign Entity Classification Hybrid entities used extensively in international tax structuring US “Check the box” Regulations Two stage Dreyfus principles Company for Irish Tax Partnership for US Tax
35. Overseas Expansion One of the initial decisions is whether a local country is needed for legal/regulatory purposes – if not may choose between branch/entity Consider projections i.e., profits/losses in early years and local incentives such as tax holidays, incentives such as additional capital allowances etc and factor into decision Branch will only be taxable in overseas country on branch income whereas a local company is taxable on worldwide income Possible double use of losses (home country and branch location) if using a branch for early years
36. Financing in an Irish Group Two alternative tax treatments for interest: 25% - passive income 12.5% - financing entity Need substance as a financing entity to avail of 12.5% rate – risk on tax deduction for interest expense is high if trading treatment not met – would need to qualify as interest as a charge. FX issues may also arise. Tax deduction for interest expense is generally at 12.5% in a trading company unless interest as a charge relief conditions are met – then 25% relief for interest on a paid basis
37. Financing in an Irish Group Consideration of following important Order of group relief for excess charges Funding the borrowing company Paying for group relief Interest free loan to borrowing company
38. Financing – Irish Parent Co Irish parent company Specialised group finance companies Financial trader eligible for 12.5% rate Risks of failing as group finance company Sec 247 conditions FX issues – CGT on non trading Locate group finance company in country where trading status distinction not relevant for deductibility?
39. International Tax Structures Practical Consequences Tax Benefits v Costs Compliance and Administration Board Meetings Corporate Governance, Accounting, Auditing Anti Avoidance Laws Banking Covenants Three Stages Analysis Implementation Care and Maintenance
40. Tax Residence of Companies
41. Place of Incorporation Test S23A: General rule since 1999: A company that is incorporated in Ireland is tax resident in Ireland Subject to two exceptions where: The company or a related company carries on a trade in the State and the company is a relevant company, or The company is regarded as tax resident in another territory under a tax treaty with Ireland and is not regarded as tax resident in Ireland.
42. What is a Relevant Company? A company that is controlled directly or indirectly by persons who are tax resident in an EU/DTA country and not under the control of persons who are not so resident or A company which is, or is related to, a company the principal class of shares of which is substantially and regularly traded on a recognised stock exchange in an EU Member State (including Ireland) or DTA country.
43. Substantially & Regularly Traded No definition in the legislation For DWT purposes: Revenue: “Shares are substantially & regularly traded where the shares are traded on a regular basis each year in more than de minimus quantities”
44. Control S432 Test: Series of different potential ways to be controlled including possession of or entitlement to acquire: - More than 50% of the share capital of the company or issued share capital of the company, or More than 50% of the voting power of the company, or More than 50% of the income on a distribution, or More than 50% of the assets on a winding up. Includes entitlement to acquire at a future date Multiple persons can control the same company
45. Treaty Exception Beware of dual-resident companies Don’t assume the tie-breaker clause is in line with the OECD treaty e.g., Canada – Competent authorities decide residence where the company is regarded in each country under domestic law Always check the relevant treaty
46. Central Management & Control Non-Irish incorporated companies always fall within this test Irish incorporated companies that fall outside of the place of incorporation test (i.e., not resident based only on the place of incorporation test) still subject to the management & control test Principles established by case law to be ascertained based on facts: Where are the real business decisions made?
47. Relevant Company Non-Irish incorporated companies always fall within this test Irish incorporated companies that fall outside of the place of incorporation test (i.e., not resident based only on the place of incorporation test) still subject to the management & control test Principles established by case law to be ascertained based on facts: Where are the real business decisions made?
48. Relevant Company No Is co controlled >50% by EU/DTA residents? Is Co quoted on SE in EU/DTA Country or 50% related to a quoted Co? Not a Relevant Co No Yes Is Co controlled >50% by non-DTA/Non EU residents? Yes Yes No Relevant Co
49. Residence Is the Co incorporated in Ireland? No Yes Not Resident Is Co Managed & Controlled in Ireland ? Is Co “rel Co” & trading in Ireland/related to Irish trading Co? No Yes No Yes Is Co resident in DTA Country under Treaty? Not Resident Yes Yes No Resident
50. UK Guidance HMRC INTM120120 Situation where Co Residence likely to be challenged Co Claiming UK Residence UK owned co – business carried on mainly abroad Foreign owned co with obvious UK tax advantage Foreign owned co – possible conduit for overseas income
51. UK Guidance HMRC INTM120120 Situation where Co Residence likely to be challenged Co Claiming non UK Residence UK owned Co carries on business in UK UK owned co carries on business abroad – diversion of income from a UK resident co Foreign owned co carries on business mainly in UK
52. Principles from Case Law Combination of factors will point to place of residence: Where are the meetings of the directors held? Where do the majority of directors reside? Where are the shareholders’ meetings held? Where is the negotiation of major contracts undertaken? Where are the questions of important policy determined? Where is the head office of the company? Where are the books of account kept, the accounts prepared and audited, minute books kept, company files kept, company seal kept and share register kept? From where are dividends, if any, declared? Where are the profits realised? Where are the company’s bank accounts?
53. Residence Principles
54. Establishing/Maintaining Residence Residence is not a “once off” test – needs to be maintained through regular meetings of the board of directors in the country of residence on an ongoing basis One of key risks of challenge in many international tax structures is whether tax residence is actually where the company contends it to be (Woods v Holden and Untelrab Ltd v McGregor) Key factors are residence of directors and the location of board meetings Majority of directors should physically attend meetings
55. Establishing/Maintaining Residence Suitable preparation and provision of information – not just rubber stamping of decisions made elsewhere Conference calls best kept to once off emergency situations Usually have suitable provisions in Memo & Articles of Association to provide for directors & shareholder meetings to be held in the country of intended residence; company secretary and majority of directors to be resident in that country; authority to use the company seal in that country etc Detailed board minutes should be maintained to evidence the meetings held
56. Changing Location of Residence Clear break needed in establishing residence in other location Consider exceptions from place of incorporation test – will company fall within trading or treaty exemption? Establishment of Residence in new location involves: Appoint new board of directors majority resident in new location Regular board meetings in new location of residence Sever ties with old locations – close bank accounts, move accounting records etc Change of residence marks the end of an accounting period Notification requirement within 30 days 11F CRO – S882 TCA
57. Exit Charges
58. Exit Charges S627 TCA provides for a CGT charge to arise on a deemed disposal and reacquisition at market value by a company of all of its assets where it migrates its tax residence outside of Ireland (“exit charge”) Do not fall into this provision if the company merely ceases to exist e.g., through liquidation Company will continue to be Irish incorporated under company law – just changes tax residence Subject to 2 exceptions
59. Exemptions from Exit Charge Excluded company: Not less than 90% of its issued share capital is held by a foreign company or by a person directly or indirectly controlled by a foreign company Foreign Company: Not resident in the State, Is under the control of a person or persons resident in a DTA Country, and Is not under the control of a person or persons resident in Ireland
60. Will IrishCo Suffer Exit Tax on Migration? US Resident Individual UK Resident Individual US Parent 100% Thailand Res Parent 100% IrishCo: To migrate tax residence form Ireland to Singapore IrishCo
61. Exemptions from Exit Charge Further exemption in the case of assets of a company that migrates its tax residence out of Ireland but carries on a trade in Ireland through a branch or agency after that time and: The assets are situated in Ireland immediately after the migration and are used in or for the purposes of the trade or are used//held for the purposes of the branch/agency. Assets include exploration/exploitation assets/rights Under S29 TCA these assets continue to be subject to CGT even though company is non-resident
62. Postponement of Charge Irish parent with a 75% subsidiary holding “foreign assets” Foreign assets are assets of the company that immediately after the migration are situated outside the State and are used for the purposes of a trade carried on by the company outside the State Allowable losses on disposal of foreign assets are offset against chargeable gains with the single chargeable gain on those assets, referred to as the “postponed gain” Postponed gain is treated as not arising to the migrated company on a joint election by both companies but may be recovered from the Irish parent in certain circumstances
63. Postponement of Charge Joint election must be made within 2 years of migration for: Irish parent to pay the tax if within 10 years of migration the company ceases to be a 75% subsidiary of the Irish Parent or the Irish parent company ceases to be resident in Ireland, and Where the assets are sold within 10 years of migration the Irish Parent must pay the tax May elect (within 2 years of the gain being triggered for Parent) to get relief for unutilised losses of the Subsidiary
64. Collection of Exit Tax Where an exit charge arises and is not paid within 6 months after the tax becomes due and payable: The Revenue may serve a notice to another group company (in same group as the migrating company within 12 months of the date of migration) or to a controlling director of the company/a controlling company requiring that person to pay the outstanding tax within 30 days. Time limit for Revenue notice begins when the return was due to be filed and ends 3 years after the tax return is filed for the period in question Provision for resident company to recover tax from taxpayer
65. Saturday Session
66. Irish Holding Companies No special type of corporate form i.e., can be limited or unlimited registered company or an SE Can also be incorporated outside of Ireland but Irish tax resident via exercise of central management and control in Ireland May have an intermediate Holdco – less restrictions from a company law perspective in terms of share redemptions Irish stamp duty of 1% applies on the transfer of shares in an Irish incorporated holding company
67. Irish Holding Companies Income of Holdco is generally mainly dividend income, may be some other investment income such as deposit income May be capital gains on disposal of equity investments Operating expenses generally: Interest expense on funds borrowed to finance investments, and Admin expenses related to the management of the company.
68. Holding Company Regime in Ireland
69. Participation Exemption CGT exemption is available for the disposal of certain qualifying shareholdings (S626B TCA 1997) Broadly applies to a disposal by a “parent company” of shares in a qualifying investee company To be a “parent company” the company must hold at least 5% of the ordinary share capital of the other company for a continuous period of at least 12 months The 5% holding must entitle the parent to at least 5% of the profits available for distribution and 5% of the assets on a winding up
70. Parent Company Example Parent Investee TradeCo Investee TradeCo Investee TradeCo 1/06/99 31/12/99 1/01/99 Dispose 5% OSC Acquire 10% OSC Acquire 10% OSC Does S626B apply to disposal?
71. Parent Company Example Parent Investee TradeCo Investee TradeCo Investee TradeCo 1/01/10 31/12/10 1/01/99 Dispose 8% OSC Dispose of 2% OSC Acquire 10% OSC Does S626B apply to 31/12/2010 disposal?
72. Conditions for Relief Applies where an investor company disposes of shares in an investee company if: The investor company is the parent company of the investee company at the point of disposal or at some point within 2 years of the date of disposal, The investee company is EU/DTA tax resident, and At the time of disposal the investee company is a wholly or mainly trading company or the business of the investor company, the investee company and each company of which the investor company is the parent company taken together consists wholly or mainly (more than 50%)of carrying on a trade or trades.
73. Group Shareholdings In 51% group situations, a company that is a member of the group is entitled to take into account shares held by another group company in determining whether the shareholding requirements are met In determining whether the group is wholly or mainly trading, Revenue Tax Briefing 66 provides that “the primary tests are the proportion of net trading profits and the proportion of net trading assets, though other factors may be taken into account” Intra-group transactions are excluded
74. Interaction with Other Reliefs S626B relief takes precedence over (S584 TCA) reorganisation relief which deems there to be no disposal so where S626B applies there is a disposal just no chargeable gain S626B does not apply to disposals: Undertaken at no gain/no loss for tax purposes A gain on which would not be a chargeable gain for tax Which are part of a life business fund under S719 Of shares deriving their value from Irish specified assets That are deemed disposals under S627 (migrations)
75. Assets Related to Shares S626C broadens the relief to include “assets related to shares” where the person immediately before the disposal holds shares in that company and would qualify for the participation exemption on a disposal of those shares or is part of a group where a group company holds such shares Assets related to shares include: An option to acquire/dispose of shares in the company A security with rights by virtue of which the holder is or may become entitled (whether by conversion, exchange or otherwise) to acquire or dispose of shares in the company, an option to acquire or dispose of shares in the company or another security falling within this provision
76. Schedule 25A To be read in conjunction with S626B and S626C Useful provisions for carry over of holding period in case of certain no gain/no loss transfers and reconstructions Explicit provision that where there is a deemed disposal under CGT Acts the holding is not regarded as continuing for during that period for participation exemption purposes Sale and repurchase and stock lending arrangements – broadly seller is treated for participation exemption purposes as continuing to hold the shares throughout i.e., holding by interim holder is ignored Cannot claim negligible loss relief if actual disposal would have qualified for participation exemption
77. Schedule 25A Where a de-grouping charge would apply under S623 and the disposal would qualify for participation exemption – deemed to make a disposal and reacquisition immediately before the degrouping Where a chargeable asset is appropriated to trading stock and a disposal would have qualified for the participation exemption then the company is deemed to dispose of the asset – qualifying for the participation exemption
78. Taxation of Foreign Dividend Income
79. Taxation of Dividends Dividends one Irish resident company to another are generally exempt from corporation tax as FII (S129) (exception re close company dividend surcharge) Possible for companies to jointly elect (S434(3A) TCA) to disregard the dividend for close company purposes resulting in: Not a dividend payment to avoid a close company surcharge, and Not FII received which would form part of surchargable income Election to be filed with tax return for the period
80. Inbound Dividends Dividends received from companies not resident in Ireland may be either exempt, taxed at 12.5% or taxed at 25% 12.5% rate applies to: Dividends paid out of trading profits of a company that is resident throughout the period in an EU/DTA jurisdiction, or Dividends from any company out of trading profits where the company or a 75% parent company is listed on a recognised stock exchange in a relevant territory, or Dividends from portfolio holdings (<5% direct or indirect shares and votes) that are taxed as part of Case III income and received from a Co resident in an EU/DTA jurisdiction
81. Dividends from Lower Tiers There is a look through test whereby dividends paid by a lower tier subsidiary to the payer company out of trading profits are also regarded as part of the trading profits of the payer company where that company is tax resident in an EU/DTA jurisdiction 12.5% rate therefore also applies to the onward distribution of those profits to the recipient company Key test is place of residence of the company i.e., you could have a trade carried on in a non-treaty country via a branch and those profits could qualify for 12.5% rate if overall company is resident in EU/DTA state
82. Example 1 Does the dividend from B to A qualify for the 12.5% rate? Assume C is a TradeCo and all dividends are paid out of the trading profits of the company. Neither A nor B is listed. A: Irish Parent €100k B: UK Holdco €100k C: French TradeCo
83. Example 2 Does the dividend from B to A qualify for the 12.5% rate? Assume C is a TradeCo and all dividends are paid out of the trading profits of the company. Neither A nor B is listed. A: Irish Parent €100k B: UK Holdco €100k C: Brazil TradeCo
84. Example 3 Does the dividend from B to A qualify for the 12.5% rate? Assume C is a TradeCo and all dividends are paid out of the trading profits of the company. Neither A nor B is listed. A: Irish Parent €100k B: Brazil Holdco €100k C: UK TradeCo
85. Example 4 Does the dividend from C to B qualify for the 12.5% rate? Assume C is a Trade Co and all dividends are paid out of its trading profits. A’s shares are listed on and regularly traded on NYSE. A: Brazil Parent B: Irish Holdco €100k C: Brazil TradeCo
86. De Minimus Test There is a de minimus test whereby if at least: 75% of the total profits of the paying company for the period are trading profits, and The value of assets* (at the end of the accounting period in which the dividend is received by the recipient Co) used by the receiving company and each company of which it is the 5% parent company for the purposes a trade or trades is not less than 75% of the value of all of the assets* of those companies, then: all of the dividend shall be treated as paid out of trading profits of the paying company * Other than specified assets: shares in one of the companies held by another of those companies or loans between 2 of such companies
87. Inbound Dividend Exemption Dividends received from companies not resident in Ireland are exempt from corporation tax where they are: Dividends from portfolio holdings (<5% shares and votes) that are normally taxed as part of Case I income i.e., forming part of an Irish trade. Whether those dividends were paid out of trading profits or not is irrelevant.
88. 25% Rate 25% rate applies to all other foreign dividends Notably: Non-EU/non-treaty dividends in an unlisted group, Non-EU/non-treaty dividends in an group listed outside of recognised stock exchange in an EU/DTA State, Dividends not paid out of trading profits (apart from amounts qualifying under the de minimus test), Dividends paid out of income/profits of an excepted trade – these are not trading profits for the purposes of the 12.5% rate.
89. Order of Selection of Profits Order is the same as that outlined in Module 8 for FTC relief: If dividend is paid out of profits for a specified period, that period, If dividend is not paid for a specified period but is paid out of specified profits, those profits, or If dividend is not paid for a specified period nor out of specified profits the dividend is deemed to be paid out of the last period for which accounts of the company were made up before the dividend became payable, Any excess go back to previous period and so on.
90. Foreign Tax Credit on Dividend Income
91. Overview of FTC Relief Treaty relief for withholding tax and (where specific minimum holdings are held) for tax paid on the profits represented by the dividend (“underlying tax”) Unilateral relief (i.e., under domestic law) for withholding tax and underlying tax suffered where a specific minimum shareholding is held (minimum 5% ordinary share capital holding) Unilateral relief for tax suffered at lower tier levels on profits which are distributed to the Irish shareholder company (minimum holding of 5% voting rights required)
92. Parent Subsidiary Directive
93. Parent-Subsidiary Directive Aim ?
94. EU Directive – interposed into Irish law in S831 TCA Conditions: Directive: Minimum 10 % shareholding (as of January 1, 2009) S831: Minimum 5% share capital requirement Optional requirement for holding for at least two years –in Ireland 2 year test only applies if it is required in a tax treaty that Ireland has concluded with another territory Companies must be considered tax resident in an EU Member State and not considered, under a tax treaty, to be resident outside the EU Parent-Subsidiary Directive
95. Established in one of the legal forms mentioned in the Parent/Subsidiary Directive: Companies constituted under the laws of a Member State (all 27 Member States) Includes the European Company, certain co-operatives, mutual companies, funds... Extension of the application to permanent establishments Subject to one of the (corporate) taxes listed in the Directive without the possibility of an option of or of being exempt Parent-Subsidiary Directive
96. Consequences: No withholding tax on dividend in source state (i.e., no DWT on dividend paid to parent) Relief for double taxation in home state (i.e., parent state): Exemption method Tax credit method Also includes for relief third country and lower tier taxes so long as all of the companies are EU companies for the purposes of the Directive Ireland applies the credit method of granting relief in Parent for tax suffered at subsidiary level Parent-Subsidiary Directive
97. Benefits of Directive will not apply where parent company is interposed to avail of the benefits of the Directive (S831(6) TCA) Restriction applies where: Majority of voting rights in Parent Company are controlled, directly or indirectly, by persons who are not resident in an EU/DTA jurisdiction, unless It is shown that the parent company exists for bona fide commercial reasons and does not form part of any scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of liability to income tax, corporation tax or CGT. Anti-Avoidance
98. Extended to Swiss tax resident companies (having one of the specific corporate forms outlined) provided there is a minimum 25% holding of voting power by the parent in the subsidiary- S831A TCA Swiss company cannot be exempt from taxation In both an EU and Swiss context, where the Parent Subsidiary Directive applies the DWT declaration form requirements are not applied – but a return of the dividend must still be filed with Revenue under S172K Swiss Companies
99. Foreign Tax Credit Calculation
100. Dividends-ForeignTaxCreditRelief Unilateral relief applies provided the Irish company directly or indirectly owns, or is a subsidiary of another company which directly or indirectly, owns at least 5% of the ordinary share capital of the company paying the dividend Credit is available for withholding tax suffered on the dividend and also for tax paid on the profits out of which the dividend is paid
101. Relief for Third Country Taxes Relief is available for taxes paid (directly on the dividend or on underlying profits) by a lower tier subsidiary on the profits distributed up the group to the Irish company provided: the foreign company that pays the dividend to the Irish company is related to the lower tier company, and the lower tier company is connected with the Irish company that receives the dividend “Related to” and “connected with” mean: Controls directly or indirectly, or Is a subsidiary of a company that controls directly or indirectly not less than 5% of the voting power of the other company
102. Foreign Tax Credits – Example 1 Example – No withholding Tax: X Ltd has a 50% subsidiary based in the UK, Y Ltd. It received a dividend of €50,000 from Y Ltd in December 2011 out of Y Ltd’s trading profits. The results of Y Ltd are set out below (Euro equivalents). No withholding tax applied on the dividend. Year ended 31 December 2011: € Revenue 800,000 Total expenses (incl depreciation of €5k) 600,000 Net profit 200,000 Less: Tax at 28% (* See note) (57,400) Profit after Tax 142,600 Note: Tax = 200,000 + 5,000 (Dep A/B) @ 28% (pre 1/4/2011)
103. Calculation of Underlying Tax Identify Foreign Tax Qualifying For Credit: Underlying tax rate = . Foreign tax . Relevant profits + Foreign Tax UK effective rate = . 57,400 . = 28.7% 142,600 + 57,400 Gross up dividend at the underlying effective rate = 50,000/ 1-.287 Grossed up dividend (in Total income) = €70,126 Dividend received gross of WHT = €50,000 Underlying tax qualifying for credit = €20,126
104. Calculation of Irish Tax Calculate the lower of the Irish and UK effective rate: Irish effective rate = 12.5% (assume dividend is from trading profits) UK effective rate = Foreign tax = 20,126 =28.7% Irish measure of income 70,126 Gross up net dividend at the lower effective rate = 50,000/ 1-.125 Grossed up dividend = €57,142 Irish tax on the dividend (12.5%) = € 7,142 Credit utilised against the dividend (12.5%) = € 7,142 Deduction = €12,984 “Gross” Excess credits available = €12,984
105. Calculation of Irish Tax Calculate Irish tax liability on the income: Gross dividend in total income* = €70,126 Less: Deduction = €12,984 Taxable income = €57,142 Irish tax on the dividend (12.5%) = € 7,142 Credit utilised against the dividend (12.5%) = € 7,142 No Irish tax payable -0- . * Net dividend plus creditable WHT as step 2.
106. Foreign Tax Credits – Example 2 Example – With withholding Tax: X Ltd has a 50% subsidiary based in the US, Z Ltd. It will receive a gross dividend of €50,000 from Z Ltd in December 2011 out of Z Ltd’s trading profits. The results of Z Ltd are set out below (Euro equivalents). 5% withholding tax will apply on the dividend. Year ended 31 December 2011: € Revenue 800,000 Total expenses 600,000 Net profit 200,000 Less: US Tax (80,000) Profit after Tax 120,000
107. Calculation of Underlying Tax Identify Foreign Tax Qualifying For Credit: Underlying tax rate = . Foreign tax . Relevant profits + Foreign Tax Underlying Tax Rate= . 80,000 . = 40% 120,000 + 80,000 Gross up dividend at the underlying effective rate = 50,000/ 1-.4 Grossed up dividend = €83,333 Dividend received gross of WHT = €50,000 Underlying tax qualifying for credit = €33,333 Withholding Tax qualifying for Credit = € 2,500 Total foreign tax qualifying for Credit = €35,833
108. Calculation of Irish Tax Calculate the lower of the Irish and US effective rate. Irish effective rate = 12.5% (as dividend is from trading profits) Irish measure of foreign income = net dividend + foreign tax available as a credit = 47,500 + 35,833 = 83,333 US effective rate = Foreign tax/Irish measure of income = 42% Gross up net dividend at the lower effective rate = 47,500/ 1-.125 Grossed up dividend = €54,286 Irish tax on the dividend (12.5%) = € 6,786 Credit utilised against the dividend (12.5%) = € 6,786 Deduction = €29,047 “Gross” Excess credits available = €29,047
109. Calculation of Irish Tax Calculate the Irish tax payable on the income: Dividend in total income = €83,333 Less: Deduction = €29,047 Taxable net dividend = €54,286 Irish tax on the dividend (12.5%) = € 6,786 Credit utilised against the dividend (12.5%) = € 6,786 No Irish tax payable -0- .
110. Foreign Tax Credits – Example 3 Example – Lower Tier Taxes: Irish Parent holds 100% of UK Sub 1 which holds 100% of UK Sub 2. UK 2 is a Trade Co and the group is a trading group. Results are as follows in Euro. Year ended 31 December 2011: UK 1 UK 2 € € PBT before dividend 100 3,200 Dividend rec’d 1,680 -0- Total income 1,780 3,200 Less: UK Tax (30) (960) Profit after Tax 1,7502,240 Dividend proposed 1,400 1,680
111. Calculation of Underlying Tax Step 1 – Start with lower tier Sub – UK 2 - Identify Foreign Tax Qualifying For Credit: Underlying tax rate = . Foreign tax . Relevant profits + Foreign Tax Underlying Tax Rate= . 960 . = 30% 2,240 + 960 Gross up dividend at the underlying effective rate = 1,680/ 1-.3 Grossed up dividend = € 2,400 Dividend received gross of WHT = € 1,680 Underlying tax qualifying for credit = € 720 Withholding Tax qualifying for Credit = € -0- Total foreign tax qualifying for credit = € 720
112. Calculation of Underlying Tax Step 2 – Use Step 1 to calculate overall tax suffered by UK 1 - Identify Total Foreign Tax Qualifying For Credit: Underlying tax rate = . Foreign tax . Relevant profits + Foreign Tax Underlying Tax Rate= . 30 + 720 . = 750/2,500 = 30% 1,750+ 30+ 720 Gross up dividend at the underlying effective rate = 1,400/ 1-.3 Grossed up dividend = € 2,000 Dividend received gross of WHT = € 1,400 Underlying tax qualifying for credit = € 600 Withholding Tax qualifying for Credit = € -0- Total foreign tax qualifying for credit = € 600
113. Calculation of Irish Tax Step 3 - Calculate the lower of the Irish and UK effective rate. Irish effective rate = 12.5% (as dividend is from trading profits) Irish measure of income = 1,400 + 600 = 2,000 UK effective rate = Foreign tax 600 Irish measure of income = 2,000 = 30% Gross up net dividend at the lower effective rate = 1,400/ 1-.125 Grossed up dividend = €1,600 Irish tax on the dividend (12.5%) = € 200 Credit utilised against the dividend (12.5%) = € 200 Deduction = 600-200 = € 400 “Gross” Excess credits available = € 400
114. Calculation of Irish Tax Step 4 – Calculate Irish tax payable on the income. Gross dividend = €2,000 Less: Deduction = € (400) Net taxable income = €1,600 Irish tax on the dividend (12.5%) = € 200 Credit utilised against the dividend (12.5%) = € 200 No Irish tax payable -0- .
115. Dividends– Pooling of Credits In previous examples we had no additional Irish tax as the Irish tax was covered in full by the foreign tax credit. Additional Irish tax can arise on one dividend whereas excess credits can arise on another dividend stream. There is provision for pooling of credits and excess credits not pooled/utilised can be carried forward for use in future years. Applies to treaty and non-treaty dividends. Require 5% minimum voting power in company that pays dividend – either direct or a holding by a 50% parent of Irish Co.
116. Dividends– Pooling of Credits Excess foreign tax credits arising on dividends taxable at 12.5% can be offset against Irish tax on other 12.5% dividend streams but not against Irish tax on dividends taxable at 25%. Excess foreign tax credits arising on dividends taxable at 25% are available for offset against tax on dividends at 12.5% or 25%. The utilisation of excess credits carried forward for use in future years follows the same rules. The amount of the pooled credits are: 87.5% of excess credits in case of 12.5% dividends, and 75% of excess credits in case of 25% dividends.
117. Dividends Pooling - Example Example: X Ltd is an Irish resident company with an Australian and a Chinese subsidiary (both 100% owned) from which it received dividends during the year ended 31 December 2010. The results of each company for Y/E 31/12/2010 are as follows: AustraliaChina PBT 200,000 150,000 Foreign Tax 30,000 5,000 Net income 170,000145,000 Dividend proposed 50,000 50,000 No withholding tax applies to either dividend
118. Calculation of Underlying Tax Step 1 – Identify Foreign Tax Qualifying For Credit: Australia Underlying tax rate = . Foreign tax . Relevant profits + Foreign Tax Underlying Tax Rate= . 30,000 . = 15% 170,000 + 30,000 Gross up dividend at the underlying effective rate = 50,000/ 1-.15 Grossed up dividend = € 58,823 Dividend received gross of WHT = € 50,000 Underlying tax qualifying for credit = € 8,823 Withholding Tax qualifying for Credit = € -0- . Total foreign tax qualifying for credit = € 8,823
119. Calculation of Irish Tax Step 2 - Calculate the lower of the Irish and Aus effective rate. Irish effective rate = 12.5% (as dividend is from trading profits) Irish measure of income = 50,000 + 8,823 = 58,823 Aus effective rate = Foreign tax 8,823 Irish measure of income = 58,823= 15% Gross up net dividend at the lower effective rate = 50,000/ 1-.125 Grossed up dividend = €57,143 Irish tax on the dividend (12.5%) = € 7,142 Credit available = € 7,142 Deduction = = € 1,681 “Gross” Excess credits available = € 1,681
120. Calculation of Underlying Tax Step 1 – Identify Foreign Tax Qualifying For Credit: China Underlying tax rate = . Foreign tax . Relevant profits + Foreign Tax Underlying Tax Rate= . 5,000 . = 3.33% 145,000 + 5,000 Gross up dividend at the underlying effective rate = 50,000/ 1-.033 Grossed up dividend = € 51,706 Dividend received gross of WHT = € 50,000 Underlying tax qualifying for credit = € 1,706 Withholding Tax qualifying for Credit = € -0- . Total foreign tax qualifying for credit = € 1,706
121. Calculation of Irish Tax Step 2 - Calculate the lower of the Irish and China effective rate. Irish effective rate = 12.5% (as dividend is from trading profits) Irish measure of income = 50,000 + 1,706 = 51,706 China effective rate = Foreign tax 1,706 Irish measure of income = 51,706 = 3.3% Gross up net dividend at the lower effective rate = 50,000/ 1-.033 Grossed up dividend = €51,706 Credit available at 3.33% = € 1,706 Deduction = = € -0- Excess credit available = € -0-
122. Dividends – Pooling of Credits X Ltd Corporation Tax Computation Y/E 31/12/2011 AustraliaChina Gross dividend 58,823 51,706 Less: Deduction foreign tax (1,681) -0- . Case1 (after FT deduction) 57,14251,706 Irish Tax at 12.5% 7,142 6,463 Less: Foreign Tax Credit (7,142)(1,706) Tax payable -0- 4,757 Pooling of excess credits: 1,681 * .875 (1,470) Net corporation tax payable -0- 3,287
123. Foreign Exchange Issues
124. Foreign Exchange Issues Foreign Exchange (FX) gains/losses are not taxed in line with P&L account entries in a manner similar to trading companies Instead all foreign currency balances e.g., movements on foreign currency bank accounts, fall with CGT rules. No CGT on disposal of a liability. Therefore, a withdrawal from a US$ bank account in a holding company is treated as a disposal of an asset Gain/loss computed as acquisition price = Euro equivalent of amount on date of acquisition and disposal price = Euro equivalent of the proceeds on disposal
125. Foreign Exchange Issues Limited relief in S79A for: Shareholdings denominated in foreign currency of 25% or more in trading companies or first tier holding companies of trading companies Can match FX gains/losses on the shares against gains/losses on FX borrowings or share capital denominated in foreign currency Must elect for this treatment within 3 weeks of the acquisition of shares
126. Foreign Exchange Issues Would look to rely on this where participation exemption would not apply e.g., if the holding was in a trading company in a non-EU/non-treaty jurisdiction as S626B would not apply Depending on how FX rate moves can have a positive or negative financial impact benefit is that it eliminates the tax risk FX rate movements.
127. Profit Repatriation
128. DWT Exemptions for Non-residents For non-resident companies to avail of a DWT exemption they must fall within one of the following clauses: Company is EU/treaty resident and is not controlled, directly or indirectly, by Irish residents, Company (wherever resident) is directly or indirectly controlled by EU/treaty resident persons and that person(s) is not under the control of persons who are not so resident, Company is, or is a 75% subsidiary of a company, whose principal class of shares are quoted and substantially and regularly traded on a recognised stock exchange in a relevant territory or such other exchange as is approved by the Minister for Finance, or
129. DWT Exemptions for Non-residents 4. Company is, wholly owned by 2 or more companies, whose principal class of shares are quoted and substantially and regularly traded on a recognised stock exchange in a relevant territory or such other exchange as is approved by the Minister for Finance. For individuals (non-corporate) the person must be resident in an EU/tax treaty jurisdiction DWT non-resident declaration form must be completed and filed with the Irish paying company Valid for 5 years or specifically to 31 December in 5th year following issue
130. DWT Exemptions for Non-residents
131. Capital Reductions/Share Buybacks Alternative means of cash repatriation Consider legal issues as regards the redemption/buyback Unlimited companies can reduce share capital without going to the Courts Consider CGT and also dividend treatment for any premium on the buyback (S130(2)(b)) S175(2) TCA treats buybacks in case of listed companies or their 50% subsidiaries as CGT (subject to FA 2010 anti-avoidance)
132. Reorganisation of Holdco Before: Individual shareholders After: Individual shareholders Trade Co A Trade Co B New Holdco Trade Co B Trade Co A
133. Reorganisation of Holdco From an Irish perspective possible to undertake such a reorganisation on a no gain/no loss basis under S584/S586 – treated as no disposal of old shares and no acquisition of new shares Not relevant for a non-resident unless the original shares in Co A & Co B were shares in companies that derived their value wholly or mainly form Irish land/other specified assets under S29 TCA S626B takes precedence over S584 so where the participation exemption applies there is a disposal but no CGT liability arises.
134. Liquidation of HoldCo Two disposals to consider: 1. Disposal by Holdco of its assets, and 2. Disposal by shareholder of their shares in Holdco Normal CGT rules are to be considered in terms of reliefs etc S130 provides that a distribution by a liquidator in the course of a liquidation is not treated as a distribution for tax purposes – only CGT to be considered Remember to file first CT return within 3 months of the commencement of the winding up/liquidation
135. Migration of Holdco Exit taxes must be considered Participation exemption does not relieve exit taxes on migration Exceptions to exit tax may apply EU Freedom of Establishment Considerations
136. Ireland as a Holding Company Location Holding company should not increase the tax burden of group – at worst should be tax neutral Choice of holding company location will depend on overall commercial, legal and tax situation Many features of our tax system that make us an attractive holding company location Several improvements introduced in recent years
137. Ireland as a Holding Company Location Participation exemption on certain gains 12.5% tax rate on certain inbound dividends with credit for foreign tax – often no additional Irish tax Onshore pooling of foreign tax credits on dividends No CFC rules No thin-capitalisation No capital duty Transfer-pricing rules not applicable to holding companies Tax deduction for certain debt at Holdco level (S247 relief) Broad exemptions from DWT on outbound dividends EU Member State with benefit of EU Directives Good treaty network (63 signed – 56 in effect)
138. Ireland as Holding Co Location Advantages and Disadvantages
139. Ireland as Holding Co Location Holding co must not increase tax burden HC must be “fit for purpose” No single location meets all requirements Analysis required
140. Ireland as Holding Co Location
141. Ireland as Holding Co Location
142. Ireland as Holding Co Location
143. Comparative Analysis Consideration of specific circumstances Tax Treaties in each country Input needed from international advisors Exemption v Credit Relief? HC exemption benefits – dependent on tax in country of residence? Capital duties? Treaty benefits – cash flow issues? Anti avoidance provisions? Stability of regime over time? EU State Aid/OECD code of conduct issues?
144. Individual Tax Issues
145. Non-Resident Directors Director of an Irish incorporated company is an Irish office subject to tax in Ireland under Schedule E Subject to PAYE/USC in normal way Generally PRSI under class S1 Tax treaties generally give primary taxing rights to Ireland in case of director of Irish registered company Relief in country of residence: Credit basis, or Exemption with progression
146. Non-Resident Directors If no other Irish income not necessarily a return filing obligation Generally non-resident director will not be entitled to personal credits, allowances & deductions – S1032 Proportionate credits are available to Irish citizens, persons resident abroad for health reasons, citizens, nationals or subjects of other member states and most commonwealth citizens or where provided for under tax treaty. Full credits for resident of another EU Member State where the income taxable in Ireland is 75% or more of total income Share Options – non domiciled exclusion not applicable
147. Temporary Non-Residents and CGT Anti-avoidance provision in S29A TCA Applies where a former Irish resident and domiciled individual disposes of certain shares/rights to acquire shares while non-Irish resident and then resumes tax residence in Ireland within 5 years of the initial cessation of Irish residence Disposal is subject to tax in Ireland by way of deemed disposal at date of change of residence Applies to shares either valued at over €500,000 on 31 December before ceasing Irish residence or more than 5% of the issued share capital by value of the company
148. Temporary Non-Residents and CGT Applies where the disposal would not otherwise be subject to Irish tax Tax return and payment obligations arise in year individual returns to Ireland/resumes residence with ref to due dates in that year Form of unilateral relief where foreign tax suffered in a treaty country – i.e., person gets credit for that tax No relief for double tax otherwise
149. Accounting for Tax Issues
150. Accounting for Tax Foreign Currency Volatility in Reported Earnings Use of reserves to record certain FX gains and losses FC denominated liabilities to hedge net investment FC denominated intra group loans part of net investment
151. Accounting for Tax Identify FX gains and losses arising at individual co level and consolidated accounts Where FX gains and losses recorded in Financial Statements Mitigation of volatility in reported earnings for group structuring transactions Pitfalls Functional currency not correct at outset Unforeseen translation differences on intra group balances – not eliminated on consolidation Loans to intermediate HC – mismatch with equity investments Application of net investment hedging - misunderstood
152. Functional Currency Irish GAAP and IFRS – prescriptive Selection of local currency for each entity in Group FC determined appropriate for the entity Consolidated Financial Statements in FC of parent Presentation Currency Measurement done in functional currency
153. Irish GAAP SSAP 20 – FC used -primary economic environment of operation Individual accounts – retranslate monetary assets and liabilities to FC using balance sheet rate FX differences in P&L Non monetary items not retranslated Exception in limited cases for foreign equity investments FX gains and losses not eliminated at consolidated accounts Underlying intra group balances are eliminated
154. Irish GAAP Closing rate or Net Investment Method Apply closing rate (at reporting date) SSAP 20: Closing rate or average rate FX difference between CR and AR to reserves Separate FX translation reserve not mandatory Statement of Total Recognised Gains & Losses
155. Irish GAAP Temporal Method More limited application Limited range of functions carried out by group entities More dependent on currency of investing company All transactions in currency of investing company
156. IFRS FC: Currency of the primary economic environment in which the entity operates IAS 21 Primary factors to determine the FC Currency influencing sales price Currency of country whose regulations determine sales price Currency influencing labour, materials and other costs Does entity have different FC than parent? Contrast Irish GAAP temporal method and IFRS Closing rate used for consolidation GAAP for individual companies – IFRS for group
157. Intra Group Loans Retranslate to FC of each entity at balance sheet rate Differences recorded in P&L in entity and consolidated accounts Loans forming part of group’s net investment – FX differences can be taken to FX currency reserve in consolidated financial statements Advances must be akin to equity Intra group balances on trading activity – FX gains/losses to P&L Includes management charges, intra group interest etc
158. Net Investment Hedging Irish GAAP and IFRS Net Investment Hedging Models Translation gains and losses – recorded in the FX Translation Reserve in consolidated accounts Offset gain/loss on translation of net investment Hedge accounting is voluntary IAS 39
159. Disposal of Foreign Operation IFRS – Cumulative FX gains/losses must be transferred to P&L when foreign operation is disposed of May be better to record all gains/losses on translations to P&L – with offset on consolidation
160. Company Law Issues Use of “Golden Shares” to avoid breach of Sec 31 CA 1990 Sec 155 CA 1963 – definition of “subsidiary” Sec 244 CA 1990 – subsidiary can acquire shares in HC – conditions apply Capitalised Reserve No voting rights Profits from the distribution must be reduced by purchase price Sec 17 Guarantee – C(A)A 1986 Sub may avail of consolidated group audited FS for filing with Annual Return to CRO Limits disclosure of information
161. Company Law Issues Branches Register with CRO Par XI CA 1963 EC (Branch Disclosure) Regulations 1993 “Branch” not defined legally EU Concept – ECJ ultimate determination Completion of Form 12(EU)/Form 13(Non EU) Directors Sec 2(1) Ca 1963 - ..by whatever named called Body corporate cannot be a director Dual capacity – director and secretary Two directors and one secretary One director must be EEA resident – or hold Bond
162. Round Up International Structures Concepts Irish context Aims and tax consequences Debt and Interest Relief Tax Residence of Companies Tax Law UK Guidance Case Law – principles Exit Charge
163. Round Up Ireland as Holding Co Location Participation Exemption Taxation of Dividends FTC – calculation and pooling Profit Repatriation Capital Reductions Reorganisation/Liquidation/Migrations Advantages and disadvantages of Ireland as HC location Comparative Analysis
164. Round Up Individual Tax Issues – PAYE/PRSI/USC Resident Directors Non Resident Directors Tax Compliance Payroll Personal Tax Credits Temporary Non Residents – CGT
165. Round Up Accounting for Tax Issues Foreign Currency Pitfalls Irish GAAP and IFRS Functional Currency Closing Rate/Temporal Method FX in P&L/Translation Reserves Treatment on consolidation FX gains/losses on intra group loans Net Investment Hedging Disposal of Subsidiary
166. Round Up Company Law Subsidiary v Branch Branch Registration Directors Requirement and Residency