Ireland's offshore tax and legal regimes

The term 'offshore' is not used in Irish legislation or in describing company forms. Use of the various special regimes available in the Shannon Free Zone, the Dublin International Financial Services Centre, or through the 'Manufacturing Rate' of tax, or via a non-resident company are the main ways of achieving offshore tax treatment, although all these regimes have effectively been superseded by the introduction of a nation-wide corporation tax rate of 12.5% as from 2003. There were, however, some grandfathering provisions for pre-existing regimes.

In January, 2004, then Irish Finance Minister Charlie McCreevy signed an Act to incorporate the provisions of the European Savings Tax Directive into Irish law. Although the Directive itself did not become fully effective until July 1st 2005, the European Communities (Taxation of Savings Income in the Form of Interest Payments) Regulations 2003 required domestic banks to establish the identity and residence of beneficial owners of all new bank accounts opened in Ireland from January 1st 2004. Irish banks now obliged to pass on details of savings income for taxation purposes to the Revenue Commission who are tasked with passing this information on to the tax authorities of the EU member state where the customer resides.

Forms of Low Tax Operation

In Ireland there are no specific forms of company or other entities designed for offshore operation. There are a number of special taxation regimes offering low taxation; and non-resident companies offer a highly effective means of reducing international tax bills, although their efficacy has been reduced in some situations by the new rules introduced by the Finance Act 1999, following the Irish Government's agreement with the EU on a 12.5% mainstream corporation tax rate.

Now that the agreed new regime is fully operational in Ireland, the various special regimes have ceased other than for existing companies; on the other hand, the agreed new regime is far superior to anything available elsewhere in the EU. It is difficult to see what other major EU country would be brave enough to take its corporation tax rate down to 12.5%; and it is unlikely that the EU itself is going to allow an (even more harmful) tax competition to develop between member states. Ireland has probably got away with a sensational deal which is just going to look better and better as time goes by.

The International Financial Services Centre

The International Financial Services Centre (IFSC) has been the successful centrepiece of the Irish Government's appeal to the international financial community in the last ten years. A wide range of financially-oriented companies, now including corporate financial service centres as well, have traditionally been able to obtain a 10% rate of corporation tax and a number of other fiscal advantages by locating themselves physically in the Customs House area of Dublin's dockland, which has been extensively fitted out to be a suitable home for state-of-the-art financial businesses.

To some extent the IFSC is history, since its purpose has mostly disappeared now that the overall 12.5% corporation tax rate is effective (2003), and new entrants were permitted for the last time in 1999, on a quota basis. However, it is probably still useful to give some basic details of the Centre. It was established for the following types of operation (abbreviated and summarised):

Provision of foreign currency services for non-residents;
Carrying on international financial activities for non-residents, including money-management, derivatives, securities dealing;
Insurance;
Administrative and systems support for the above.

In order to take advantage of the fiscal advantages offered by the IFSC, a certificate had to be issued by the Minister for Finance, and application was made initially to the Industrial Development Agency (it should always be borne in mind that the IFSC was established - and got its EU acceptance - through its overt role as a job creation exercise). The main advantages were as follows:

Corporation tax at 10% on trading profits;
A 10-year exemption from municipal taxes;
Double rent allowances for leased property;
100% depreciation allowances for commercial buildings, plant and machinery;
no withholding taxes on dividends or interest.

The application process is of only academic interest by now, except perhaps in the event that an existing 10% certificate falls to be transferred to a new owner. It is not clear whether this is permitted under the agreement with the EU; perhaps, yes. There was no set format for an application, but it needed to address the business plan of the applicant, its funding, revenue and profit projections, and, importantly, the consequences for local employment. Existing IFSC companies retained their tax privileges until the end of 2004; but new IFSC companies receiving certificates after July 1998 paid 10% only until the end of 2002.

It is worth remarking that a number of permitted IFSC financial activities have come to be carried out by management companies, who take on the responsibilities for staffing etc that would normally have attached to the IFSC member; both parties benefit from the 10% tax rate, but the client does not have to open a separate office or even incorporate in Ireland.

The Shannon Free Zone

The Shannon Free Zone, administered by the Shannon Free Airport Development Company Ltd, was one of Ireland's earliest tax-reduction initiatives. In order to establish an operation in the Free Zone, a licence is required under the Customs Free Airport (Amendment) Act 1958; this is issued by the Minister for Enterprise and Employment. A certificate entitling a company to the tax benefits of the Free Zone (10% corporation tax rate, VAT and customs duty exemptions, etc, although see below for implications of the 12.5% tax regime) is issued by the Minister for Finance. A wide range of activities can qualify for licenses and certificates, including:

The repair and maintenance of aircraft; or
Trading activities in regard to which the Minister for Finance is of the opinion, after consultation with the Minister for Transport, that they contribute to the use or development of the Shannon Free Zone; or
Trading activities which are ancillary to either of the above or to any operation consisting of the manufacture of goods; or
Activities relating to the acquisition, disposal, licence, sub-licence and exploitation generally of intellectual property rights.

It is important to remember that the Free Zone, like the IFSC in Dublin, was primarily a job-creating measure.

Existing companies in the Free Zone had certificates giving tax benefits until the end of 2005. After that, the tax rate increased to the 12.5% mainstream rate of corporation tax agreed by the Irish Government with the EU, which came into force generally from 1st January 2003. Companies which obtained certificates during 1999 had the 10% rate only until the end of 2002. However, unlike entry into the IFSC, which was quota-limited during 1998 and 1999, no quota was set for entry into the Free Zone, which will continue to operate fully other than in respect of the special corporation tax rate.

The 10% 'Manufacturing Rate' of Tax

As originally enacted, the 10% 'manufacturing rate' of corporation tax applied to:

Companies manufacturing goods in Ireland;
Companies selling goods which are manufactured within Ireland by a 90% subsidiary, a fellow 90% subsidiary or a 90% parent company; and
Companies which subject goods belonging to another to a manufacturing process in Ireland.

The 10% rate could be claimed by a branch of a foreign company as well as by companies established in Ireland. There was no statutory definition of 'manufacturing' and over the years the Courts extended the beneficial rate to a number of activities not normally regarded as manufacturing, as well as excluding some types of activity. The permitted activities included:

Professional services performed in Ireland relating to engineering works executed outside the EU;
Computer services, including data processing services and software development, and associated technical or consultancy services;
Fish farming;
Certain shipping activities;
Repair or maintenance of aircraft, aircraft engines and components carried on within Ireland;
Film production, provided that 75% of the work is carried out in Ireland;
Approved meat processing;
Re-manufacture and repair of computer equipment by its original manufacturer;
Some types of fish sales;
Newspaper production and associated advertising sales.

Exclusions include retail sales, the building industry, mining, and leasing (but not for certificated IFSC or Shannon companies).

For true 'manufacturing' companies the 10% rate will last until the original date of 2010; for other companies it lasted only until the end of 2000. A company which did not qualify as a true 'manufacturing' company paid the declining rate of mainstream corporation tax (see Domestic Corporate Taxation) from 2001 until the final 12.5% rate agreed between the Irish Government and the EU came into effect in 2003.

Non-Resident Companies

Non-resident companies carrying on business in Ireland are liable to corporation tax on their Irish-sourced income only. Equivalent rules apply to capital gains; however there are roll-over exemptions available for capital gains.

For a number of years, residence has been determined primarily according to a 'management and control' test, with some subsidiary tests such as the location of actual trading, location of bank accounts, location of head office, etc. Until 1999 there was no statutory definition of 'residence', and it was possible to maintain non-residence for an Irish company despite a substantial level of activity in Ireland.

As part of a general response to the EU's initiative against 'harmful tax competition', Ireland installed or announced new tax regimes during 1999, agreed with the EU, which continued the existing favourable tax regime in many respects, but which brought some parts of the tax system much more closely into line with general EU practice.

Under the Finance Act, 1999, all Irish-incorporated companies became resident; however, there are a number of exceptions to the rule, some of them to accommodate the situation of multinational companies (many American) who have established themselves in Ireland. The most important exceptions are:

An Irish-incorporated company which is resident in a treaty country (Ireland has Double Tax Treaties with 44 countries) and which is not resident in Ireland will continue to be regarded as non-resident in Ireland;
An Irish-incorporated company which is under the ultimate control of a person or persons resident in an EU member state or in a country with which Ireland has a double tax agreement, or which is, or is 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 which carries on a trade in Ireland or is related to a company which carries on a trade in Ireland will continue to be able to be non-resident under the management and control test. ('Related to' means that either one of the two companies owns at least 50% of the other, or that both are owned at least 50% by a third company; 'Control' is interpreted within Irish rules that attribute the rights of shareholders to related parties and associates.)

Alongside these exceptions, some additional reporting requirements have been imposed on non-resident companies, and some stiffer incorporation rules have been imposed on all companies:

Non-resident companies must declare their country of residence, the name and address of any qualifying trading company in Ireland, the name and address of any qualifying quoted controlling company, or else the name and address of the ultimate beneficial owners;
Companies to be incorporated must intend to trade in Ireland, and will have to have at least one Irish resident director or else provide a bond.

As can probably be seen, these rules taken together are far from restrictive, and in most cases it was possible for companies either to continue non-residence as they are currently structured, or else to make reasonably straightforward adjustments to fall within the new rules.

Taxation of Foreign and Non-Resident Employees

In Ireland, the taxation of individuals is based on a mixture of the concepts of residence and domicile. See Domestic Personal Taxes for the general principles of individual taxation in Ireland, which also apply to the resident and domiciled employees of non-resident entities.

As in many countries, residence is consequent on presence in Ireland for more than half of a tax year, or a substantial cumulative total of days from previous years. An individual's domicile is in the country where he maintains his permanent home, in the country where he regards himself as belonging. Domicile in Ireland is acquired from an Irish-domiciled father, but can be changed to another country by establishing a life there. Resident foreign employees will thus not normally be domiciled in Ireland.

An individual resident and domiciled in Ireland pays tax on his world-wide income; an individual resident but not domiciled pays tax on his foreign income only if it is remitted to Ireland. A non-resident individual pays income tax only on Irish-sourced income, and is liable to capital gains tax only on gains arising in Ireland or remitted to Ireland, unless he is domiciled in Ireland in which case he is liable on all capital gains.

From 1st January 2001, non-resident individuals paid the new 'exit tax' of 23% imposed on gains on encashment or maturity of Irish-resident investment fund holdings - previously they would have been liable on an annual basis for tax of 20% on gains.

Exchange Control

Ireland has no exchange controls.

Employment and Residence

Nationals of European Union member states have free right of movement in Ireland. Nationals of other states wishing to work in Ireland require a work permit from the Department of Enterprise, Trade and Employment. The Department is obliged to issue permits when the employee has a key role, or is transferring from an international company which has or intends to have a presence in Ireland. However, the rules have recently been relaxed for certain clases of foreign national, including inter-corporate transferees, the spouses of EU nationals, and non-EU nationals who have had a child born in Ireland. In these cases letters from the employee's foreign employer, and the prospective Irish employer are now sufficient to immigrate for one year. However it is advised to check the current situation before attempting to immigrate.

In June, 2004, the Revenue Commission said it planned to step up its enforcement of Ireland’s tax exile rules by gaining access to commercial flight passenger lists and private jet schedules, in order to prevent individuals falsifying the amount of time spent out of the country.

At present, investigators are only able to make cursory checks on the movements of individual taxpayers and a review has been called for to consider whether more thorough access to passenger rosters and other information is needed to police the system. Current rules stipulate that commissioners must obtain a High Court order to gain access to such information, although this avenue has hitherto not been pursued.

Reports also indicated that the Commission wants to reduce the number of days that non-residents may reside in Ireland for tax purposes. As in many countries, residence is assumed if an individual is present in Ireland for more than half of a tax year, or for 280 days in two consecutive years.

However, this may prove more difficult for the Revenue as such rules are governed at the EU level. In a separate development, it has also been reported that the Revenue intended to investigate the financing of overseas property purchases by Irish citizens, and to ascertain whether the appropriate amounts of tax have been paid on exernal income or on capital gains through the subsequent sale of foreign property.

It was estimated that up to 50,000 Irish nationals have bought property in Spain, and thousands more have acquired houses in other popular spots such as France, Portugal and the United States.