Tag Archives: Double Tax Treaty

Holding Companies: Spotlight on Ireland

As your business expands globally you want to create the most efficient and competitive structure possible.  A holding company is an important part of that structure and requires examination of local tax laws, including any reductions in local tax for holding companies.  And should allow for maximization of profits earned by the business.  Holding companies can be located anywhere in the world, regardless of where your business operations or your target markets are located.  Determining your business needs first is essential.  For example, will any business operations take place in the same jurisdiction?  Will there be a pool of talented or skilled workers?  Identify the country where the largest market for your products or services is located, then determine whether there is a Double Tax Treaty between that country and the one you are considering as a possible holding company location.  A strong treaty network often results greater efficiencies.

Ireland had a number of boom years followed by a decline in the number of new companies locating there.  Ireland is now making changes to lure companies back with tax incentives and development programs, making it,  a very attractive location for a holding company.  Apple and other high technologies companies included Ireland in their global structures, Apple has actually had an Irish presence for the last 30 years and keeps a significant amount of its profits in an Irish subsidiary.

One of the most attractive aspects of choosing Ireland for your holding company is that it is an onshore EU jurisdiction with an extensive Double Tax Treaty network.  The following is a brief summary of what Ireland offers:

A Corporate Income Tax rate of 12.5% on trading profits, compared to 30% in other EU jurisdictions and 25% on passive income.  Dividends received from foreign subsidiaries, located in the EU or a country with which Ireland has a Double Tax Treaty, are taxed at 12.5%.  Ireland does not have a “participation exemption,” but does grant foreign tax credits that can reduce or eliminate tax on dividends; minimum 5% shareholding is required to receive any foreign tax credits.  The Foreign tax credits granted are quite flexible and can be applied to different dividend streams.  Any unused tax credits can be carried forward indefinitely.  Gains from the sale or other disposal of shares, and potentially other assets in a subsidiary are exempt from capital gains tax, provided the parent holding company holds owns at least a 5% equity interest in the subsidiary.  This equity interest can be held directly or indirectly and must be held for at least a twelve month period before qualifying for the tax exemption.

Withholding taxes are levied at 20%, but the existence of a Double Tax Treaty will reduce the withholding rate to between zero and 15%.  Ireland has a general anti-avoidance provision which can result in the re-characterization of transactions that have no de facto commercial purpose.

There are other factors that make Ireland a good choice for your holding company.  It has a talented, well-educated pool of workers, it is one of the few English speaking countries in the EU, a holding company can be formed in just a few days and it has a well-established financial infrastructure.

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Benefits Denied: Misinterpretation of Double Tax Treaty Provisions

Is there a growing unwillingness to respect double tax treaty provisions by revenue agencies and courts around the world?  Or is it simply a matter of incorrect interpretation of treaty provisions that has foreign business owners becoming concerned their treaty benefits are at risk?   Foreign investors need to be able to rely on double tax treaty protection and the benefits it provides.

One provision that adds to this uncertainty is the anti-discrimination provision.  This provision, in brief, is meant to put domestic and foreign companies on the same footing, by prohibiting imposition of tax  or denial of a treaty benefit, on a foreign company that is more burdensome than experienced by the domestic company, in the same circumstances.   In 2011, in a dispute before the Tax Court of Canada looked at anti-discrimination provision in the Canada – UK Double Tax Treaty where a UK company doing business in Canada through a permanent establishment, incurred capital losses of over $7 million.  Another UK company, also doing business in Canada through a permanent establishment, purchased all the outstanding shares and wound up the company.  The purchaser deducted the acquired company’s losses over a three year period.  The Minister of National Revenue denied the deductions, claiming that neither company was a Canadian company and were therefore not entitled to the deduction.  The Canadian court, in making its determination, considered a similar case before the New  Zealand Court of Appeal, and held that discrimination based on residence does not amount to discrimination.

In another case, in Russia this time, the issue was the application of thin-capitalization rules to foreign held companies.  Ordinarily, thin-cap rules disallow interest under group financing or guaranteed third party borrowings unless proven to be at arm’s length.  Unfortunately, thin-cap rules are now being applied regardless of proof that such debt is held at arm’s length and in contravention of the anti-discrimination provision.

In China, the State Tax Administration has been grappling with standardizing interpretation across its many local tax bureaus.  It issued guidelines for determining the beneficial ownership status of an foreign entity.  This qualification allows some foreign companies to reclaim a portion of the dividend tax they pay.  The guidelines have given rise to additional uncertainties in terms of implementation.  A safe harbor was created for listed companies, but uncertainty remains.   Unlisted companies are not covered by the safe harbor, without treaty benefits foreign companies pay a ten percent dividend tax, bring the total effective tax rate to approximately 32.5%.

Saudi Arabia has recently issued guidance, Circular No. 5068/16/1434,  to ease confusion regarding Saudi Arabian entities that file a claim for reduced withholding tax paid to a nonresident company.  The guidance outlines the steps necessary to claim the reduced withholding tax.   This is gives foreign investors the confidence that comes with certainty in application of the law.

Double tax treaties have the effect of limiting the sovereign authority of the state to tax income at the source.  Where the right to tax is reserved under the double tax treaty, but not in the relevant domestic tax code, the treaty should not be applied as an expansion of the domestic tax code to provide for additional taxation on foreign held companies, nor should treaty benefits be stripped.  Regrettably, double tax treaties provisions can be disregarded or misinterpreted.    The key is to be prepared, understand local interpretation, maintain required formalities and keep an eye on changes in enforcement of local tax codes.

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