Post-acquisition planning

Restructuring

What post-acquisition restructuring, if any, is typically carried out and why?

It cannot be said that there is any typical tax-driven restructuring done in Ireland post-acquisition of either shares in a company or business assets.

Of course, restructurings will often be put in place post-acquisition, with attendant tax consequences, but in our experience these are usually driven by the business requirements of the company and the group acquiring the target.

For example, we have advised on restructurings that have seen the businesses of other group affiliate companies of the acquirer move to Ireland to obtain the benefit of the low Irish corporation tax rate of 12.5 per cent.

Additionally, we have seen restructurings put in place post-acquisition to enhance the business and tax efficiency of the target company. One example might be a company with manufacturing operations in Ireland, which instead enters into a contract manufacturing arrangement, and such a structure needs to be carefully managed to preserve the entitlement of the Irish company to the 12.5 per cent rate of corporation tax.

Finally, restructurings are often put in place to extract cash from the acquired company.

Spin-offs

Can tax-neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?

It is possible for tax-neutral spin-offs of businesses to be executed in Ireland and for the trading losses of the spun-off business to be preserved. The transfer of a trade from one company to another is generally treated as the cessation and commencement of the trade, with trading losses not being available for use by the transferee. As an exception to this general rule, a provision allows a trade to be transferred from one company to another and, broadly, provided that the companies are in common ownership to the extent of not less than 75 per cent, the transferee is entitled to losses of the trade that arose while the trade was carried on by the transferor.

It is possible to avoid transfer taxes by executing a ‘hive down and hive out’ of a business, but various conditions must be met.

Migration of residence

Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?

Irish incorporated companies are generally tax-resident in Ireland. There is an exception to this where an Irish-incorporated company that is regarded as resident in a treaty partner country of Ireland, and not resident in Ireland for the purposes of the tax treaty between that country and Ireland, will be regarded as not resident in Ireland.

For companies incorporated before 1 January 2015, a second exemption also applies (until 31 December 2020 or earlier in certain circumstances). Such an Irish-incorporated company that is under the ultimate control of a person or persons resident in an EU member state or in a treaty country or which itself is, or is 50 per cent related to, a company whose principal class of shares is substantially and regularly traded on a stock exchange in an EU country or a treaty country, and that carries on a trade in Ireland or is 50 per cent related to a company that carries on a trade in Ireland, will not be tax-resident in Ireland if it is managed and controlled outside Ireland.

Where a company ceases to be resident in Ireland, an exit tax regime applies. On ceasing to be resident, the company is deemed to have disposed of and reacquired all of its assets immediately before the event of changing residence, at their market value at that time, notwithstanding that no actual disposal takes place. The charge applies at the standard corporation tax rate of 12.5 per cent, with an exception for scenarios where the event triggering the tax is part of a transaction designed to ensure the gain is taxed at 12.5 per cent rather than the standard capital gains tax rate of 33 per cent. This is an anti-avoidance provision that ensures that a 33 per cent rate applies if the event is for the purpose of ensuring that the gain is charged at a lower rate.

Interest and dividend payments

Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?

Interest paid by an Irish-resident company is subject to withholding tax, currently at the rate of 20 per cent, absent an exemption. Under Irish domestic law, various exemptions from interest withholding tax exist, in addition to exemptions provided for under certain Irish tax treaties.

Irish-resident companies are required to withhold tax, currently at the rate of 25 per cent, on dividends and other distributions. There are extensive domestic exemptions from this dividend withholding tax for non-Irish investors, subject normally to documentary filing requirements, and it is generally likely that dividends paid by an internationally held Irish company may be paid free of Irish withholding tax without having to rely on an exemption under a relevant Irish tax treaty.

Tax-efficient extraction of profits

What other tax-efficient means are adopted for extracting profits from your jurisdiction?

The making of a dividend or other distribution (whether in cash or in kind) is the most common means of extracting profits from an Irish company.

In certain cases there can be Irish company law impediments to the ability of an Irish company to make a dividend or distribution. Also, a dividend or distribution is not tax-deductible.

There are other means that could be adopted to extract profits effectively. With the introduction from 1 January 2011 of Irish transfer pricing rules (subject to certain exceptions), such rules may now need to be considered in respect of these other means.

For example, interest could be paid on a loan made by an affiliate in a lower tax jurisdiction. The critical issues here would be to ensure that there is exemption from Irish withholding tax on the interest and also that the Irish company is entitled to a tax deduction for the interest paid, which is subject to detailed conditions.

Alternatively, if another income stream could be created from Ireland to a lower tax jurisdiction and if the payment was tax-deductible, then this could be a tax-efficient way for effectively extracting profits, such as if the Irish company was to license intellectual property from an affiliate located in a lower tax country. The issue to ensure would be that withholding does not apply, that the licensor company is not regarded as receiving the income from an Irish source and that the payment made by the Irish company is not excessive, as the excessive element could be denied deductibility.

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5 August 2020