Ireland outlines international financial services strategy

The recent release of Ireland’s major strategy paper, ‘IFS2020 – A strategy for Ireland’s financial services sector 2015-2020’ addresses Ireland’s five year strategy in further developing the country as a global leader in the financial services sector.

Over the past 25 years, Ireland’s international financial services sector has grown dramatically, attracting significant levels of foreign investment, providing business opportunities for Irish companies and making a significant contribution to employment. Some of the key financial services areas dominating this sector include: investment and asset management; aircraft financing and leasing; insurance and re-insurance; securitisation and banking. As Ireland has always been a competitive location for international financial services companies, it is worth revisiting the key tax advantages in promoting Ireland as a location for international financial services (IFS).

The availability of a 12.5% corporation tax rate for trading activities

The rate of corporation tax for trading activities is 12.5% with expenses generally tax deductible if they are not of a capital nature and are incurred wholly and exclusively for the purposes of a trade. While depreciation is not tax deductible, capital allowances (tax depreciation) may be available for certain assets used for the purposes of the trade of the company. Plant and machinery is depreciated over an eight year period on a straight line basis.

Special tax regime for regulated investment funds

Ireland’s tax regime for regulated investment funds has been long established and ensures that the fund itself is essentially exempt from Irish tax on its income and gains. Tax generally only arises for the investors to the extent they are Irish individual investors. Various domestic withholding tax and stamp duty exemptions are available for Irish investment funds. The recent addition of the Irish Collective Asset Management Vehicle (ICAV) to the investment vehicles available adds to the attractiveness of Ireland as a location for investment funds. The ICAV is of particular interest to US investors due to its ability to make check-the-box elections for US tax purposes which results in more tax efficient returns for US investors.

Special tax regime for securitisation vehicles

Ireland’s special regime for securitisation vehicles has contributed to the country being a centre for asset-backed securities activities. Where securitisation entities meet a number of criteria they are subject to tax at 25% and their taxable profits will be computed in accordance with the tax rules which apply for a trading company. As a result they are entitled to a tax deduction for all ‘trade’ type expenses which normally results in tax neutrality at entity level. In the absence of this regime, as such companies are not generally considered as carrying on a trade, expenses such as interest paid would not normally be tax deductible. The securitisation regime also allows for the tax deductibility of profit participating interest (subject to certain rules).

Ireland’s extensive tax treaty network

Ireland has a wide double tax treaty network which has doubled in size in recent years. With 72 agreements signed and 68 in effect, such an extensive treaty network provides scope for reducing any tax barriers which may inhibit cross-border trading and investment. One of the action points of the IFS2020 paper is to initiate negotiations for new agreements with other countries and to update existing agreements in the coming years.

Tax incentives for technological developments

Financial technology is a sector that has been cited in the IFS2020 paper as a key area for ensuring the continued development and operational efficiencies in the financial services sector. Ireland has a favourable research and development (R&D) tax credit which allows a 25% tax credit for companies for qualifying expenditure on R&D activities. This credit is in addition to a tax deduction (at 12.5%) for the R&D spend which gives an effective tax saving of 37.5% for qualifying expenditure. Capital allowances are also available for capital expenditure incurred on the creation and acquisition of ‘specified intangible assets’ including the acquisition of intellectual property (IP). The scheme provides for a ‘wear-and-tear’ allowance against the taxable income of the company. Further, a consultation on the proposed Knowledge Development Box was recently initiated.

Dividend withholding tax and interest withholding tax exemptions

There are extensive dividend withholding tax exemptions so that in many cases, dividend withholding tax only applies to dividends paid to Irish resident individuals. In relation to withholding tax on interest payments, again, there are extensive exemptions available, one of which includes an exemption from interest withholding tax where the recipient of the interest is resident in the EU or a country that has a double tax treaty with Ireland (subject to meeting certain conditions).

Favourable tax treatment for receipt of certain dividends

Dividends received by Irish resident companies from Irish resident subsidiaries are generally not subject to Irish corporation tax. ‘Qualifying dividends’ received by Irish companies from foreign companies are subject to corporation tax at 12.5% as opposed to normal rate of 25% applicable to foreign dividends. Qualifying dividends are dividends paid out of a foreign company’s trading profits where that foreign company is tax resident in a ‘relevant territory’ or where the foreign company (or, where the company was a 75% subsidiary of another company, that other company) is quoted on one or more recognised stock exchanges in a relevant territory or territories, including Ireland. A ‘relevant territory’ means an EU member state, a tax treaty jurisdiction, or a country that has ratified the OECD Convention on Mutual Administrative Assistance in Tax Matters. Further, where the Irish company holds 5% or more of the ordinary share capital of a foreign company, Ireland will give a tax credit for both foreign withholding taxes paid on such dividends and for underlying corporate taxes paid by the paying company in its home jurisdiction, subject to certain limitations. This credit extends to state and local taxes. In the absence of an applicable treaty allowing these credits, the tax credits may be given unilaterally by Ireland, subject to certain limitations.

Employment incentive scheme for certain employees assigned to Irish operations

The Special Assignee Relief Programme (SARP) is an employment incentive scheme for certain employees assigned to Irish based operations. A qualifying individual can claim a 30% tax deduction on their Irish employment income above €75,000 for up to five years under the new SARP scheme.

With the IFS2020 strategy in place, combined with the many tax incentives and advantages available, continued expansion and growth in Ireland’s financial services sector is very likely.