Ireland's favourable corporate tax regime and its position within the eurozone makes it a favourite for UK companies wishing to reduce their heavy tax burdens. Kathleen Garrett and Stephen Hegarty report

Many large UK corporate groups, such as Shire, UBM, Henderson Group, Charter, Regus, Brit Insurance, Hiscox and WPP to name but a few, have recently migrated their tax domicile to more tax favourable jurisdictions. Many corporate groups with a parent company incorporated in Bermuda or the Cayman Islands have also migrated to other jurisdictions in recent times to avoid suggestions that they are associated with tax havens.

Migration will generally be beneficial for a UK corporate group that has low taxed non-UK profits or significant finance or IP income. In particular, compliance costs associated with controlled foreign corporations and transfer pricing rules can be reduced. Benefits are also possible for non-listed corporates with significant UK property holdings. A migration may also be efficient for groups located in jurisdictions with overly complex tax systems.

How to migrate

The tax residence of an existing holding company can usually be changed by moving its place of effective management and control outside of its existing jurisdiction for tax purposes. However, since this can trigger a tax charge on exit in some jurisdictions (for example, the UK), it is often more effective to incorporate a new parent company in the new jurisdiction and interpose the new parent company between the existing parent company and the public shareholders.

For public companies incorporated in a common-law jurisdiction, this can often be done by way of a cancellation scheme of arrangement approved by the court or share-for-share exchange. In effect, the public shareholders agree to the cancellation or swap of their shares in the existing parent company in return for shares of an equivalent amount in the new parent company. For public companies incorporated in the European Union (EU), this can also be done by re-registering the existing parent company as a 'Societas Europaea' (SE) – the new form of European public company – and then moving its registration to Ireland. EU parent companies can also migrate to Ireland by merging with an Irish public company under the cross-border merger regulations.

Establishing a new parent company as a resident outside the jurisdiction of the existing parent is often only part of the migration process as it is often necessary to transfer the foreign operations of the group from the original parent company to the new parent company and restructure the group to derive maximum benefit from the migration. A decision to migrate cannot be taken lightly. It is likely to have substantive consequences for the governance and operations of the group and it is important therefore to select a jurisdiction that requires the minimum of changes while at the same time offering maximum flexibility.

Why Ireland?

There are a number of reasons why Ireland has proved a popular location for corporate migration. First, Dublin is an established international financial centre and Ireland has a skilled and well-educated labour force as well as an experienced and efficient Commercial Court which can resolve disputes speedily in a cost-effective manner.

There are also a number of tax advantages. Ireland has a low corporation tax rate, with corporation tax on trading profits at 12.5%, as well as the ability to repatriate profits without tax costs. The country also has a comprehensive double tax treaty with 46 countries, including the US, and the same treaties with a further four countries which have been signed but are not yet in force.

Another advantage is Ireland's membership of the EU and the fact that it is the only English-speaking jurisdiction in the eurozone. As in the UK and the US, Ireland is also a common-law jurisdiction and its legal concepts will be recognised by most investors; in addition, the laws relating to personal property and the transfer of assets and the concepts of legal and equitable title are similar to those in the UK and the US.

A new parent company can be incorporated speedily in Ireland as either a public limited company or as an SE. Irish public companies must prepare their accounts in accordance with IFRS and must prepare consolidated group accounts where they have subsidiaries.

Shares in Irish incorporated companies can be transferred through the CREST system. They can also be deposited with a depository bank so that they can then be traded as American Depositary Receipts (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) that are issued in respect of Irish companies and traded on a stock exchange in the US or Canada are not subject to stamp duty. Shares in Irish incorporated companies that are transferred through the CREST system are subject to stamp duty at the rate of 1%. The transfer of shares in Jersey-incorporated parent companies are not subject to Irish stamp duty. Shares in an Irish company can also be deposited in the Euroclear system and the transfer of interests and shares through the Euroclear system should not be subject to stamp duty.

The Irish Stock Exchange (ISE) currently has responsibility for the approval of any public offer prospectus required to be issued by an Irish company. The ISE provides an efficient and comparatively speedy approval procedure for prospectuses. Takeover bids for public companies incorporated in Ireland are regulated by the Irish Takeover Panel, whose rules are based on the Takeover Code of the UK Takeover Panel as well as incorporating the EU Takeover Directive 2004/25/EC.

Taxation

Key reasons for Ireland's popularity as a destination for corporate migrations are its favourable tax regime, the fact that it is an 'onshore' EU jurisdiction and the professional and administration services that are available locally. In addition, as the tax laws in Ireland are objectively ascertainable, tax rulings prior to a transaction proceeding are rarely required but may be available if desired.

It is worth noting that the rate of capital gains tax is 22%. The sale of shares by a non-Irish resident is usually exempt from capital gains tax. An exemption also exists for disposals of 5%+ corporate shareholdings held for at least 12 months in trading companies/groups that are EU/tax treaty resident.

No dividend withholding tax applies to dividends paid to persons resident in an EU or an Irish tax treaty country or on US/Canadian listed shares held through ADRs. It is also possible to implement structures using income access shares where it is necessary to allow shareholders to continue to
receive non-Irish dividends.

Dividends received by an Irish incorporated company are taxed at 12.5% or 25% but a flexible credit system usually eliminates any tax liability on receipt; also other tax-free cash repatriation techniques are available.

Furthermore, 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.

Additional noteworthy tax points include:

• 12.5% rate of corporation tax applies to trading profits. A rate of 25% applies to passive income;
• a specific tax credit is available in Ireland for research and development activity;
• Ireland operates a favourable and flexible securitisation and finance company regime;
• Ireland does not have any thin capitalisation rule;
• Ireland does not have any controlled foreign company/US Subpart F rules;
• Ireland has very limited transfer pricing rules; and
• Ireland currently has a comprehensive framework of double taxation agreements. The agreements generally cover income tax, corporation tax and capital gains tax (direct taxes).

Obtaining and maintaining tax residence in the new jurisdiction for the new parent company is not simply a matter of ensuring that it is incorporated in the new jurisdiction. It is also necessary for the central management and control of the company to be located outside the jurisdiction of the existing parent company. The central management and control of a company is located in the jurisdiction in which the significant decisions relating to the strategic direction of the company are taken. In a case where those decisions are taken by the directors of the company at board meetings, this will be the jurisdiction in which those board meetings are held. However, the location of board meetings is not determinative where the powers of the board have been delegated or where the board simply 'rubber-stamps' decisions taken outside the board meeting.

These rules mean that a multinational group wishing to maintain its headquarters in its existing jurisdiction while at the same time satisfy itself that the new parent company is resident in Ireland must ensure all the significant strategic decisions relating to the group are taken at board meetings held in Ireland, in which the directors actively address the issues being put to them and reach a considered decision.

Kathleen Garrett is head of the London office and Stephen Hegarty a partner at Arthur Cox.