INVESTING IN IRELAND

In contrast to Ireland, the UK has one of the most complex tax regimes in the world. At the last count, there were well over 20,000 pages of tax legislation on the statute books, with each new Finance Act usually adding a further 500 pages or so. In light of this complexity, UK tax payers ( "investors" ) proposing to invest in an Irish tax resident company (" an Irish investee") need to exercise care as follows:

• ensuring that the Irish investee company does not fall to be treated as a controlled foreign company ("CFC") because of the low rate of corporate taxation in Ireland.  Whilst the controlled foreign company legislation was originally introduced with a view to preventing the parking of cash and investments offshore, the rules, which are extremely complex, can catch the unwary investor. The consequences of getting this wrong is that the profits of the Irish investee can be subject to taxation in the hands of the UK resident shareholders. This is a highly topical issue given the recent published opinion of the Advocate General ("AG") in the Cadbury Schweppes case and the subsequent decision of the European Court of Justice on the 12.9.2006 in the same case.
  
  The substance of the Court's judgement is set out in the following paragraph:

  "Articles 43 EC and 48 EC must be interpreted as precluding the inclusion in the tax base of a resident company established in a Member State of profits made by a controlled foreign company in another Member State, where those profits are subject in that State to a lower level of taxation than that applicable in the first State, unless such inclusion relates only to wholly artificial arrangements intended to escape the national tax normally payable. Accordingly, such a tax measure must not be applied where it is proven, on the basis of objective factors which are ascertainable by third parties, that despite the existence of tax motives that controlled company is actually established in the host Member State and carries on genuine economic activities there."

  On its face, this decision has major implications for the UK’s CFC regime. However it remains to be seen what approach HMRC will adopt in light of the decision.



• ensuring that the Irish investee does not fall to be treated as UK resident by virtue of the company being centrally managed and controlled and effectively managed in the UK. This is important as, if UK resident, the Irish Investee would be subject to UK corporation tax on its worldwide profits at the higher UK rate of 30%. The recent Court of Appeal decision in Holden v IRC has been a helpful development in that it has affirmed case law to date. As a practical matter, it is vital that the board of directors is made up of a majority of Irish residents and that board meetings are held in Ireland and not in the UK. Care is needed with telephone conference or video conferencing arrangements. 
  
  
• ensuring that the UK investor obtains UK tax relief for interest on funds borrowed in order to subscribe for share capital in the Irish investee or in order to on-lend funds to the Irish investee. The UK has a specific rule disallowing interest deductions in full or in part where the main purpose or one of the main purposes of borrowing is for tax avoidance purposes. It would not be expected that this rule would apply to interest on borrowings obtained for genuine commercial purposes but the absence of any case law on this area, means that care is needed. The UK also has a transfer pricing regime which means that the arm's length principle needs to be considered to assess whether a loan would have been made by a UK company to the Irish investee in the absence of a connected relationship and indeed whether the rate of interest on that loan is commensurate with the risks assumed by the UK company. This will be a particularly pertinent issue where Irish Investee is thinly capitalised. Irish withholding tax issues would need to be considered.
  
  
• ensuring that the UK company obtains the benefit of the Substantial Shareholdings Exemption on any eventual disposal of its shareholding in the Irish investee. Broadly, for the exemption to apply, the investor has to be part of a trading group and the Irish investee would have to be a trader. As is typical with the UK, many conditions have to be satisfied to ensure that both the investor and the investee qualify.