Tax havens have long been within the cross-hairs of the OECD but events have conspired to ensure rapid change in the perception of tax havens as favourable places to locate a multinational business. In part, the change in sentiment has come in the wake of the global economic crisis: the Oxford University Centre for Business Taxation notes that “Offshore Financial Centres with lax regulation were often home to Structured Investment Vehicles (SIVs), Conduits and other off-balance sheet and off-budget vehicles, which were at the heart of events triggering the crisis”. Nervousness as to the status of tax havens is also attributable to President Obama’s tax policies. As a Senator, Mr Obama co-sponsored the Stop Tax Haven Abuse Bill in 2007, and the current US administration supports yet more extensive legislation, which would tax companies located in tax havens as domestic US corporations.This explains the move of certain US-based companies from Bermuda to Ireland, such as Accenture, Ingersoll-Rand and Covidien.
Other companies such as WPP, Shire Pharmaceuticals, Henderson, Charter, and United Business Media have migrated from the United Kingdom to Ireland, not only seeking a lower corporation tax rate (12.5 per cent as compared to 28 per cent) but also fleeing the complexity and uncertainty of pending legislative changes.
Netherlands-incorporated cement company, James Hardie, is seeking shareholder approval to migrate to Ireland because, amongst other reasons, the Irish-US double tax treaty is more favourable to their business model than the Netherlands-US treaty.
Enter Ireland which, together with Switzerland, has attracted a number of migrating companies over the last year. A key attribute is that Ireland is an onshore, white-listed jurisdiction for the purposes of the US Stop Tax Haven Abuse Bill and relevant OECD/EU codes.
THE MIGRATION PROCESS
The most simple migration involves changing the residence of an existing holding company by moving its place of central management and control from the jurisdiction of current residence (“Old Country”) to the new jurisdiction (“New Country”). In the context of an intra-EU migration, a migration could involve the creation of a Societas Europaea, and a change in its registration from Old Country to New Country, or a migration under the Cross-Border Merger Regulations.
Where Old Country charges an exit tax on change of residence, a more effective option might be to incorporate a new parent or holding company in New Country to acquire the existing parent or holding company. The migration can be achieved by way of a cancellation scheme of arrangement approved by the local court or a share-for-share exchange, whereby shareholders agree to cancel or swap their shares in the existing parent or holding company in return for shares of an equivalent amount in the new parent or holding company. It may be necessary to carry out an intra-group reorganisation at the same time.
For stamp duty reasons, the new parent or holding company will often be incorporated in Jersey, as the transfer of shares in a Jersey-incorporated company does not attract a charge to Irish stamp duty.
Migration is not a step to be taken lightly as there are enduring consequences – from a corporate governance and operational point of view - which need to be thoroughly understood and planned for in advance. An effective migration to Ireland requires that the central management and control of a company is located in Ireland. This is an absolutely key requirement. Continuing attention must be given to maintaining residence in Ireland, and conversely, ensuring that residence in the Old Country is not established or re-established. Significant decisions relating to the strategic direction of the company must be taken in Ireland. Board meetings must be held in Ireland, and the board of directors should include some Irish-resident directors. We understand that the UK tax authorities will look very closely at the location of central management and control, with a view to imputing such control to the UK, in cases where companies have migrated from the UK to a New Country. The chilling scenario, in tax terms, is where strategic decisions, intended to be taken New Country, are in fact taken in Old Country.
MIGRATING TO IRELAND
Ireland is a member of the European Union and the Eurozone and has a good track record in attracting foreign direct investment. The concepts and principles of the Irish common law system are familiar to all common law lawyers. Ireland has a favourable holding company regime. The reasons for choosing Ireland as New Country include:
- Corporation tax on trading profits is 12.5 per cent.
- Group companies will have the ability to repatriate profits to Ireland without tax costs. Foreign dividends from subsidiaries resident in the EU or a tax treaty country paid out of trading profits are taxed at 12.5 per cent, with other foreign dividends at 25 per cent; most dividends have a foreign tax credit attached which in many cases is higher than the Irish tax rate, so that generally no further charge to Irish tax should arise.
- Ireland has a wide tax treaty network and currently has 46 tax treaties in force with other countries (including a favourable treaty with China). Five more treaties have been signed and are due to come into effect soon. Ireland is currently negotiating a further 18 treaties.
- Exemption from capital gains tax on disposal of qualifying shareholdings (5 per cent or more), or assets relating to such shareholdings, in subsidiaries that are resident in the EU or in a tax treaty country.
- Attractive regime for the amortisation of intellectual property in line with accounting treatment.
- Good system of tax incentives for research and development expenditure.
- Wide exemptions from withholding tax on dividends and interest (both at a rate of 20 per cent) under domestic law: No dividend withholding tax applies to dividends paid to persons resident in an EU or an Irish tax treaty country or on U.S./Canadian listed shares held through ADRs.No interest withholding tax applies to interest paid (i) to persons resident in an EU or an Irish tax treaty country or (ii) on listed bonds or commercial paper.
- There are few limits on the tax deductibility of debt financing, which is obviously an attractive method of financing the acquisition of the new parent or holding company.
- Ireland has limited thin capitalisation legislation and does not have relevant transfer pricing/controlled foreign companies (CFC) rules.
- Shares in Irish incorporated companies can be transferred through CREST and are subject to stamp duty at the rate of 1 per cent. They can also be deposited with a depository bank so that they can then be traded as ADRs or under an arrangement that is equivalent to an ADR structure. The transfer of ADRs (or shares held under an arrangement that is equivalent to an ADR structure) which are issued in respect of Irish companies and traded on a stock exchange in the U.S. or Canada are not subject to stamp duty. Certain electronic transfers of shares are also exempt from stamp duty.
- The incorporation of the Irish holding company and approval of a prospectus (if necessary) by the Irish Stock Exchange (as competent authority responsible for public offers by Irish companies) can be achieved quickly and efficiently.