Ireland has a very beneficial tax treaty with China, and when taken in addition to Ireland’s favourable holding company tax regime it provides significant opportunities for investment into China via Ireland and from China into Ireland. A combination of the Ireland/China Double Tax Treaty and Irish domestic law can provide for a tax free exit from China in the event of a future disposal.
Ireland/China Double Tax Treaty
The treaty which was signed into law in 2000 contains two key tax benefits:
- no Chinese capital gains tax on the disposal of Chinese shares; and
- a reduced rate of withholding tax of 5% on dividends paid from China to Ireland.
Capital gains tax withholding - planning opportunity
Withholding tax on capital gains made on the disposal of Chinese shares by an Irish company is zero in all circumstances regardless of shareholding size except where the shares derive their value principally from Chinese real estate. The standard rate in China is 10% and treaty protection is required to reduce it below this rate.
Accordingly when an Irish company disposes of its shares in a Chinese company (subject to the exception referred to above on the disposal of Chinese real estate) no Chinese capital gains withholding tax will apply. In addition, where the Chinese company was trading the Irish company will be able to benefit from the Irish participation exemption from capital gains tax thereby ensuring a tax free disposal. The exemption is available to trading companies and to holding companies.
Where the Chinese company principally derives its value from Chinese real estate then an Irish sub-holding company can also provide an effective exit mechanism. In this instance the disposal of the Irish sub-holding company itself can result in a tax free disposal. This would of course require that the disposal of the Irish company itself qualifies for participation exemption in the parent’s jurisdiction.
With the exception of the Chinese tax treaty with Barbados which currently exempts all gains including real estate, the Irish treaty is the only one that reduces the tax on non real estate gains to zero regardless of shareholder size. The Chinese treaty with Mauritius provided for a similar benefit but this was eliminated in 2006 when a new treaty took effect. The Chinese treaties with some countries, including the US, provide a nil rate of withholding tax in non-real estate cases but these generally require a 25% shareholding.
A planning opportunity exists here to use an Irish holding company for investment structures into China to benefit from the zero rate of capital gains tax where it is anticipated that capital gains will accrue in the future.
This is illustrated in diagrammatic form below:
Please click here to view diagram 1.
Note 1: Where the Chinese Company principally derives its value from real estate a sale of shares in the Irish holding company will avoid the 10% Capital Gains Tax withholding rate.
Note 2: Where the Chinese Company is a trading company the sale of shares in this company by the Irish company will avoid the 10% Capital Gains withholding tax.
Dividend Withholding Tax- Dividends paid out of China
There are two reduced withholding tax rates on dividends paid out of China. The first is 5% and this applies on dividends paid to Ireland, Hong Kong, Mauritius, Singapore and Barbados. The second rate is 10% and this is the rate applying to dividends from China to countries that include the US, UK, Netherlands.
Given the recent changes in Irish tax law it is unlikely that any additional Irish tax is payable on dividends paid from China. Subject to certain conditions an Irish company can elect to pay 12.5% corporation tax on dividends paid from trading profits from a DTA country such as China. In addition the Irish/Chinese DTA permits a credit for underlying Chinese tax and withholding tax provided there is a 10% shareholding relationship.
Conclusion
The table below sets out a comparison between Ireland and other holding company locations. In combination with Ireland’s lack of Controlled Foreign Company or transfer pricing legislation it is clear that the Ireland/China treaty offers significant advantages over other traditional holding company locations
Comparison of Treaty Benefits
Please click here to view table.
Tax Treaties (as at March 2011)
Albania
(signed - not yet in effect)
Australia
Austria
Bahrain
Belarus
Belgium
Bosnia Herzegovina (signed - not yet in effect)
Bulgaria
Canada
Chile
China
Croatia
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Georgia
Germany
Greece
Hong Kong (From 1 January 2012)
Hungary
Iceland
India
Israel
Italy
Japan
Korea
Kuwait (signed - not yet in effect)
Latvia
Lithuania
Luxembourg
Macedonia
Malaysia
Malta
Mexico
Moldova
Montenegro (signed - not yet in effect)
Morocco (signed - not yet in effect)
Netherlands
New Zealand
Norway
Pakistan
Poland
Portugal
Romania
Russia
Serbia
Singapore (signed - not yet in effect)
Slovak Republic
Slovenia
South Africa
Spain
Sweden
Switzerland
Turkey
United Arab Emirates (signed - not yet in effect)
United Kingdom
United States
Vietnam
Zambia
