MNCs and International Trade
A pro-business legal environment, low corporate tax rate and favourable tax regime make Ireland an attractive location for foreign companies to locate here.
For MNCs, the benefits include:-
- a 12.5% rate of corporation tax (6.25% for certain IP companies).
- domestic and EU treaty exemptions from outbound interest, royalty and dividend withholding taxes.
- participation tax exemption on disposals of shares in trading subsidiaries.
- an effective tax-exemption on inbound dividends from foreign subsidiaries.
- a tax credit rebate system for R&D expenditure.
- no thin capitalisation rules.
- Transfer pricing established in line with OECD international standards.
The headline rate of Irish corporation tax is 12.5%. In addition to this rate - which applies to trading activities - a rate of 25% applies to certain restricted and offshore activities and most passive onshore investment companies are taxable at an 'effective-rate' of 40%.
An effective rate of 6.25% can be achieved on profits generated from onshore R&D activities where the required level of substance in Ireland is met.
Companies involved in the acquisition, development and licensing of IP may qualify to be taxed at an effective-rate in the range between 6.25% and 12.5%. The actual rate may vary from year to year having regard to the nature of R&D carried out.
When tax depreciation relief is taken into account, MNC's with IP in Ireland can achieve effective rates of tax in Ireland well below 6.25%.
Foreign income and passive income such as interest, rental and other non-trading income is taxable at 25%.
Capital gains are taxed at 33% and 40%.
Gains on the sale of substantial shareholdings in companies resident in EU Member States or a tax treaty country are exempt if certain conditions are satisfied.
To general conditions for accessing exemption from are:-
- the Irish company must hold a participation of at least 5% in the subsidiary,
- the participation must be in place for 12 months (although relief can be met even where this rule is not met),
- the Irish company and the investee company must have one common director,
- the investee must be a trading company or a member of a “trading group”, and
- the investee must be resident in an EU Member State or a Double Taxation Treaty territory.
It should be noted that participation relief will not apply where the greater part of the value of the transferee is derived from land in Ireland.
Dividend withholding tax at the standard income tax rate (currently 20%) applies to dividends, interest, patent royalties and other profit distributions made by Irish resident companies
Generally speaking, such payments are exempt when made to persons resident in EU Member States or in countries with which Ireland has a tax treaty.
Ireland has concluded tax treaties with 74 countries. Different rates of withholding tax can apply to interest, dividends and royalties, depending on the terms of the particular treaty.
Transfer pricing refers to the pricing of transactions between related companies, generally within the same group.
For many companies, such transactions must be at an Arm’s Length Price (ALP) with documenting evidence supporting this pricing.
In 2011 transfer pricing legislation came into effect in Ireland. Since then all Irish companies within the ambit of transfer pricing law are obliged to maintain documentation evidencing the arm’s length nature of intra-group transactions. The ALP requires that transactions between related parties are priced for tax purposes as if the counter-parties were unrelated.
No tax deduction is available for any amount paid or payable by a person to a connected person in another territory for adjustments made to the profits of that connected person for which relief is available under the provisions of a tax treaty with Ireland, or for a similar adjustment made to the profits of a connected company resident in a non Double Taxation Treaty country.
Foreign dividends are generally subject to the 12.5% rate, but the availability of tax credits means that such dividends are generally no liable in Ireland.
Ireland provides a unilateral tax credit in respect of foreign withholding tax suffered.
Ireland's extensive Double Taxation Treaty network provides for foreign tax credit pooling arrangements regarding the taxation of income from investments including dividend income received from trading companies resident in the EU or treaty country.
In addition to providing a corporation tax rate of 6.25% for companies that generate profits as a result of qualifying R&D activities, a 25% R&D tax credit is available to all companies for qualifying R&D capital and revenue expenditure.
Consequently the effective 'cash' value of tax relief for R&D activities is 37.5%.
The credit may be used to offset corporation tax exposure or to tax-efficiently reward key employees.
Country-by-country ("CbC") reporting applies in Ireland, and companies with global revenues in excess of EUR 750 million are required to file an annual CbC report.
Interest paid by a non-trading company to a non-Irish and non-EU/tax treaty resident 75% parent company is reclassified as a dividend.
Ireland has no controlled foreign corporation rules or thin capitalisation rules. Finally, there are no custom duties on Irish goods on their importation into other parts of the EU.